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Monday, May 4, 2015 - 02:16

A weak currency typically does very little to boost the morale of a country. However, some market analysts and commentators swear by its ability to rebalance a challenged economy and drive an export-led recovery. The obvious question then is, could the weak rand help turn South Africa’s economic fortunes around by stimulating the country’s long-suffering manufacturing sector?

The answer, according to Graham Bell, Strategist at Old Mutual Equities, a boutique of Old Mutual Investment Group, is that it could, but as a standalone driver it is unlikely that it will.
“Unfortunately, a weak currency, while often welcomed by countries in need of an economic kick start, is by no means a panacea,” Bell explains, “as was made painfully clear to the United Kingdom in the years following the 2008 economic crisis.”
He explains that despite a devaluation of around 30% in the Sterling between 2008 and 2013, the country saw little of the hoped for recovery. Instead, it ended up with a still weak economy and, what’s worse, an uncomfortably large current account deficit.
“Given the historically poor performance of the SA manufacturing sector in recent years, exacerbated by the labour and energy challenges it now faces,” says Bell, “it’s likely that we’ll find ourselves in the same boat as the UK did then, at least for the foreseeable future.”
Considering that the most recent figures released by Stats SA put manufacturing output down by 2.3% year-on-year, despite a plummeting local currency, Bell’s sentiments certainly appear to ring true. “While the theory behind a devalued currency driving a rebalancing economy looks sound on the surface, it first requires a number of factors to fall into place,” he explains, “not least of which are increased manufacturing capacity, improved price competitiveness, and stronger locally-driven consumption.”
Unfortunately few, if any, of these factors are taking place in South Africa. The problem, Bell contends, goes beyond the previously cited labour and energy uncertainty that continues to plague the country. It also steams from an inability, or unwillingness, of local manufacturers to pass the full financial benefit of the weaker local currency on to prospective international buyers. He explains that there could be many reasons for this, including margin protection, still comparatively high costs of labour, or even stubbornly low productivity levels.
He also highlights that the parallel weakening of the Euro is also doing little to help the manufacturing and export situation in South Africa since parts of the Eurozone have historically been some of this country’s biggest buyers. In fact, according to Bell, while the rand has weakened sharply against the US dollar recently, the rand has actually been flat for over a year against a basket of currencies of all of SA’s trading partners. “Given that inflation here is higher than for our trade partners, this actually means the rand has appreciated in real terms,” he says.
“Irrespective of the reasons why, the fact that demand for SA exports isn’t flying right now has an obvious dampening effect on the potential for manufacturing to step up to the plate,” he argues. 
However, he doesn’t discount the possibility that long-term rand weakness could be one of the factors that helps return manufacturing to its rightful place as an economic driver. He just doesn’t believe that a weak currency alone has the power to achieve that. “The fact that five out of 10 SA manufacturing divisions had negative growth in the three months to end-January 2015 shows that currency weakness alone will never turn the SA manufacturing sector around,” he surmises.
“That’s going to take a combination of innovation, talent development, enabling government policy, a rebound in Eskom’s production capacity and a sincere will by manufacturing stakeholders to sacrifice margins in exchange for sustainable competitiveness.”

Copyright © Insurance Times and Investments® Vol:28.5 1st May, 2015
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