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Johannesburg - When the rand fell to its previous record in 2001, it fuelled export-led growth that lasted until the global financial crisis. That isn’t happening this time.
More than four years of currency declines - to a fresh low this week - aren’t enough to offset electricity shortages, strikes and slowing demand from Asia and Europe that are pushing the economy to the brink of recession.
The very industries that should benefit from the rand’s slump are the ones being hobbled.
“Any competitive advantage South Africa may have got from a weaker currency is rapidly being given away through wage increases and higher inflation expectations,” Peter Attard Montalto, an economist at Nomura, said from London.
“Exports are also under pressure because of the slump in metals prices and output constraints that have arisen due to the lack of electricity.”
Load shedding
Eskom has implemented load shedding on 99 days this year, the legacy of a decade of underinvestment in new generating capacity. Load shedding has forced mines and factories to scale back production at a time when rising wage demands boost costs and commodity prices plunge.
The economy shrank an annualized 1.3% in the second quarter, the first contraction in more than a year, as manufacturing fell into recession, the statistics office said on Tuesday. In the six years that followed the rand’s previous record low in 2001, annual growth averaged 4.7%.
The rand has been on a losing streak since 2011, partly due to mounting domestic woes and investor disenchantment with emerging markets.
Pressure on the currency has intensified this year as the SA Reserve Bank prepares to raise interest rates, commodity prices that account for more than half of South Africa’s exports dive and the Chinese economy slows.
‘Bleak Outlook’
SA exports mainly raw materials to China, its biggest trading partner. The pace of growth in export volumes more than halved to 2.3% in 2014 and compares with expansion of 9.4% in 2010, according to data from the central bank.
“The rand is one of the emerging market currencies that’s most vulnerable to economic weakness and policy uncertainty in China,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail.
“A more competitive rand is of little help to South Africa’s exporters when the underlying problem is a lack of Chinese demand and mounting concerns about the credibility of Chinese economic policy. This is an extremely bleak external backdrop for commodity currencies.”
While the rand is down 12% against the dollar this year, eight other emerging-market currencies have fared even worse.
