Deficit shock: Rand needs to weaken

2012-10-31 21:00

Johannesburg - South Africa's trade deficit widened sharply in September on a big fall of the export of metals and other mining products, the South African Revenue Service said.
Exports fell 7.7% amid rolling mine strikes.
Base metal exports slumped 9%, exports of precious and semi-precious stones and metals fell 4%, and mineral exports also fell by 4%.
The trade deficit increased to R13.8bn, up 13% from August.
"The September print follows the shock deficit seen in August," Razia Khan, the head of research for Africa at Standard Chartered, told Sapa.
"In cumulative terms, the year-to-date deficit in South Africa this year is more than seven times the deficit seen over the same period last year," she said.
According to Khan the figures show the need for the rand to weaken.
"South Africa needs the lift that a moderately weaker currency might provide to start seeing some narrowing of its external imbalances," she said.
"South Africa's vulnerability to a potential reversal of investor sentiment is also made clear by this data."
Earlier this month, ratings agency Standard and Poor's downgraded the country's benchmark credit rating from BBB+ to BBB, citing the unrest affecting the key mining sector.
Kevin Lings, chief economist at Stanlib, earlier told Reuters that the problem is "that our exports are under a lot of pressure".
“I think this pattern is going to continue because we’ve become, on the import side, more import intensive generally and on the export side we’re struggling, both in volume and in the actual prices we’re getting.
“It all means that the trade balance remains weaker which ultimately means the rand is at risk even from these levels.  We are funding it, but the amount we’ve got to fund is getting bigger and bigger. And clearly we’re not able to quite attract that level of foreign investment.”
Emerging market anlayst at 4Cast Anisha Arora said the figure compares much worse than what the market and 4Cast expected, and also fares worse in comparison to 2011’s surplus of R2.53bn.
“Both exports and imports dropped more than expected on a monthly basis, though exports posted a very sharp drop of -16.4 percent year-on-year. The export oriented nature of the South African economy combined with waning external demand has seen regular export growth diminish this year," she told Reuters.
“Add to this an increase in the value of merchandise imports, particularly oil and fuel prices in recent months, the pressures are building on external trade and we only expect this to widen further into the end of 2012.”
The rand initially fell to R8.69/$ on the data, but pulled back to R8.6732 at 15:55. It was bid at R11.2694/€ from its previous close of R11.1899 and at R13.9773/£ from R13.8739 before.
- Fin24

  • blip.noodlum - 2012-10-31 20:12

    Indeed -- a weaker Rand is a boon for exporters and job-creation. Yet uninformed people think "weaker" is a sign of despair. No grasp of basic economics.

      tasneem.sattar.5 - 2012-10-31 21:40

      ...and what about importers? what about input costs going up for consumers and businesses who rely on goods imported to operate(oil in particular, has a wide impact). While we don't want a rand thats too strong for the reasons you state, I think its just as problematic too have the currency too weak, so try adopt a more open-minded approach and consider different view points, as informed as you may think you are, you may still learn something new. Judging by your comment I'm guessing you're no economics guru yourself.

      trevor.dean.10 - 2012-10-31 21:43

      That may be true in the short term, but in the longer term a weak Rand will come back to bite us in the form of higher inflation.

      carl.v.rooyen - 2012-10-31 22:02

      @ blip on the radar; I am afraid you are sorely mistaken, a weak rand is not at all good for the economy; 1) It drives the price of imports up and we import a lot which ultimately leads to inflation and a raising of the interest rates. 2) Most of our locally produced goods are priced using PPP meaning that we pay dollars even in SA for local goods, this also makes things more expensive.Coal is priced this way and this raises the cost of electricity. 3)If an exporter can get a better price overseas for a local product, why on earth would he keep the local prices down? He will raise prices in line with overseas pricing, again making things more expensive and driving up inflation. 4) Petrol price will deffinately go up and that will flow through the system. 5)The only people that benefit from the weakened exchange rate are the exporters and their empoyees and then only in the short term. As time passes the prices locally and overseas reach an equilibrium and this negates the weaker exchange rate. Then the only thing the only thing SA is left with is a weak exchange rate, factories full of employess that have to be retrenched, rampant inflation and aforementioned increased interest rates. 6) Increasing interst rates leads to a capital inflow ( google carry trade) and this leads to the exchange rate strenghtening again but not to its previous point. The trouble is that most people have absolutely no clue about economics, and this is first year stuff. You need to look at the whole

      william.hall.12979 - 2012-10-31 22:44

      Carl, to respond point by point: 1) yes, and thats a good thing, as then local producers are able to compete with cheap imports, giving local manufacturers a boost. It is short sighted to be importing things you can make at home, as that will lead to a trade deficit and weaken your currency.... and capitalism will ensure equilibrium over time. Granted some things cannot be made at home...see point 2. 2)Most? maybe some raw materials and sasol fuel, even so shareholders of SASOL are mostly locals, so money is redistributed within the local economy - bigger margins means bigger bonuses and bigger spending, meaning the economy does better. 3) of course, and as soon as someone notices him making super profits, he starts a competing business, driving prices back down locally = new businesses, jobs, etc. 4)Yes, and as a scarce and expensive imported commodity, maybe people need to use it more wisely. Please note though that we are close to cost parity for biodiesel that can be made right here, joining up with point 1, meaning importing it can be substituted for local production, creating more businesses, jobs, etc. 5) Absolute rubbish - a lot of exporters import some parts they need due to cost efficiencies. Pricing those imported products above locally manufactured equivalents results in reduced imports and increased local supply arrangements = more businesses, more jobs, etc. So carl please do not imply you know anything about economics but only give one side of the argument.

      william.hall.12979 - 2012-10-31 23:30

      Oh and to respond to the last point as i got a bit long-winded for the comment box: 6) Relying on capital inflows (including carry trade) to fund a trade deficit is futile. Being dependent on "capital inflow" basically compares to a household relying on borrowed or inherited money to buy overseas holidays, and eating out, etc. as they cannot be bothered to live within their income by taking more conservative holidays and eating at home. I believe that the Rand has already weakened sufficiently for the positive effects to start to surface - it just wont happen overnight.

      carl.v.rooyen - 2012-11-01 00:28

      @ Trevor, We could debate about this the entire evening and neither of us would be correct. I certainly don't know everything about economics but I do know enough to make an educated decision; rightly or wrongly I believe that its a zero sum game until productivity is increased either through more efficient labour or technology. 1) Inflation is not a bad thing as you said, but what is bad is unstable levels of inflation - hence the monitory policy (inflation targeting). Weakening the exchange rate will have an influence on inflation that will force the hand of the reserve bank. This is not great for two reasons; debt gets more expensive - more delinquency and spending slows down. Sadly its the lower income earners that are most effected by this. The job losses may undo the gains that were made in the increased manufacturing sector. 2)And yes most- most primary goods are priced in dollars - from food to minerals and these costs are passed up the manufacturing chain until it reaches the final consumer - as these costs move they are compounded. The employees of Sasol et al may do well but is that increase in money supply equivalent to the increase in the cost of foodstuffs, transport, electricity etc? I don' know, 3)As pricing lowers locally with the opening of competing businesses we lose the cost advantage that we had and will export less. And less dollars flow in, the trade deficit widens, the exchange rate weakens and the cycle starts again.

      carl.v.rooyen - 2012-11-01 00:38

      4)I do agree that we need to be more conscious of the way that we use our natural resources. And although we are approaching parity on biofuel there is the nagging issue of using productive land for fuel instead of food in a water scarce country. Dare I suggest that this may again drive up food priced as we have seen overseas? A solution to this would be algae based biofuels and they are also getting closer to parity – not there yet though 5)A lot of the parts that we import are not manufactured locally nor is there sufficient demand for someone to set up a factory locally. Those manufacturers are usually capital intensive industries and rely upon economies of scale. While the argument applies that a South African manufacturer could also do the same and export , that relies upon a weak exchange rate and if it strengthens the business may not be viable as our cost base is higher here. 6)Relying on carry trade is a poor tactic and we need to become a net exporter to address the trade deficit, I agree and is a short term solution, FDI is not even ideal as profits are repatriated but at least local jobs are created. The volatility is the issue and makes running a business difficult. A weak exchange rate has positives as you pointed out We need a stable exchange rate and an increase in productivity to move forward otherwise it is a zero sum game in the global playing field

      johan.wilsnach - 2012-11-01 06:33

      Have you been smoking with these fools who wants a weaker currency all the time? A weaker currency means higher input cost, higher conversion costs weaker returns on investment, lower profit margins. Job creation??? How?? Do you need me to carry on ? The list is endless on a weaker rand. Maybe it's a good thing to change the face of the Rand.

      krad.knight.56 - 2012-11-01 07:25

      ahhhhh I think tht ur a real blip lol...U r one of those that dont grasp 'basic' economics. Wat abt the import of fuel and oil that is a key factor in driving inflation ? any thoughts on that einstein ?

      blip.noodlum - 2012-11-01 09:22

      Importers simply bring in products made by a foreign workforce. Manufacturing is a big employer, distribution of imports far less so. If imported input costs rise too high, it becomes profitable to source these inputs from local suppliers --- more local jobs. If demand for imports drops away quite a lot, the balance of payments might move from a substantial deficit into surplus, improving the country's creditworthiness and making borrowing cheaper. And, in the end, the lack of demand for import forex will drive the Rand back up again. It's self-regulated by supply and demand.

      odupreez - 2012-11-01 12:40

      If we were a major exporter of finished goods, I would not have a problem with this way of thinking, but alas we export raw minerals and minor exports of any other goods. Our big imports are fuel, electronics and other finished goods (clothing items and it will seem as if we will soon be a importer of mealies and other farm products - as the eradication of farmers take place), we even import rubbish from our BRICS partners, AND we give away electricity to our neighbours.

      blip.noodlum - 2012-11-02 00:16

      It really doesn't matter WHAT you export but THAT you export. Ore or finished goods, it makes little difference. Do what you do, do well boy.

  • markus.sukram.94 - 2012-10-31 22:13

    Well, glad to see that our government has fantastic knowledge about the impact of cost push inflation...oh wait...

      blip.noodlum - 2012-11-02 00:14

      Inflation (cost-push or demand-pull) is only at 6% now. When our currency was so strong that it was worth more than the US Dollar in 1972, our inflation rate was 21%. Go figure.

  • drcpot - 2012-10-31 22:35

    Thanks Carl, one only needs good understanding of maths to understand this, hence the importance of it in our education. I always get angry when these talks comes up. We as people will come in second, I worked hard for an amount in Rand that can loose its worth in days, I'm slowly getting all my money in foreign currency.

  • motley.fool.9 - 2012-10-31 23:19

    We are net importers at this stage. So we need to weaken our currency so that on net our payments for imported goods can increase. Right.

      blip.noodlum - 2012-11-02 00:12

      If imports get dearer we will buy fewer of them. And, if they really get to be dear enough, we'll make them ourselves, because it might now be a profitable proposition.

  • trevor.bush.9655 - 2012-11-01 04:31

    Last I saw, it was illegal within the global community to weaken your currency? Added to that, until the ANC stops indirectly effectively killing our farmers, destroying economically viable land in the name of "land reform", something ZIM has proven NOT to work, and changes it's overall economic policies, nothing will improve in SA, it will only get worse and these "quick" fixes which the ANC is well known for are not a long term viable solution.

      blip.noodlum - 2012-11-02 00:10

      No, it's not illegal to drive the value of your currency down. It's just very, very difficult to do so.

  • simon.templer.549 - 2012-11-01 04:35

    william.hall: I see your point, and that is why the Zimbabwe dollar became such a sought after currency, because it kept on going south until it became toilet paper. The mess the world is in was caused by reverse economics you seem to support. There is no country in the world history that reaped any benefit from a weak currency. Travel through Africa and see what happened to the Kwatcha, the Metical, etc, etc. Because we import far more than we export, (and this will escalate because of labour legislation and unrest) the Rand is heading south with the Zim dollar. Will you drive to work or holiday when fuel (locally produced!) costs R20 a litre? Electricity costs quadruple due to the export earnings on (local) coal. Believe me, experience taught us older folks, devaluating your currency is a very bad idea. The only thing we learn from history is that nobody learns from history.

      rajesh.sukha - 2012-11-01 07:17

      There are more reasons for the poor economics of Africa then the strength of the currencies? And if you look at europe, strong currencies haven't saved them from recession.

  • dave.hardman - 2012-11-01 07:40

    This is all well and good, but we need to show our currency some respect. It is not a long term solution, to devalue the Rand every time the natives get restless. This is the easy way out. Its time to encourage our export potential

      blip.noodlum - 2012-11-01 10:20

      40 years ago in 1972, one US dollar could be bought in SA for only 75c South African. A decade earlier one British pound was yours for only R2. Were the Americans and the British agonising over their pitifully weak dollars and pounds? Of course they weren't. They were riding the greatest economic boom in their history on the back of their "weak" currencies -- manufacturing and exporting and having jobs and prosperity for all their citizens. When their currencies "strengthened", however, things started to turn pretty grim. American and British manufacturing lost global market share hand over fist to the "weak currency" nations like Japan. Has being part of a "strong currency" Eurozone created prosperity for the former weak-currency states like Italy, whose Lire at the switch to Euros was worth only 1/2000 of a Euro? Or Greece, whose drachma was hardly much better, as was the Portuguese escudo or the Spanish peseta? Manufacturing in these formerly "weak currency" eurozone states is now in deep crisis whereas it once was robust. Why is China deliberately undervaluing its own Renminbi/Yuan and artificially pegging it at outrageously low values to the US$? Because a "weak" currency is an exporter and manufacturer's best friend, that's why. "Strong currency" fetishists just refuse to grasp the economic stupidity of their "strong currency is good" fallacy. A strong currency is like a strong body odour. Strong is NOT good.

  • larry.piggott1 - 2012-11-01 07:54

    You can not keep giving pay rises in excess of 10%, when the rest of the World gets 2-3% and not affect exports and imports. With all the pay rises, over the past 10 years, there has been practically no increase in productivity. We are pricing ourselves out of the market. A weaker Rand will help, but better to tie any pay increase to productivity.

  • ACvanNiekerk - 2012-11-01 08:00

    I have to agree that devaluing the Rand even more will definitely hurt South Africa more in the long run. We are already a net importer - the weaker the Rand becomes the more we are going to pay for everything we import already. It's not a solution. We need to focus on educating and training our people so that we can reap the huge profits generated from managing the entire production process ourselves - not selling our precious minerals for nothing and buying it back from places like China at ten times the cost. I remember the last time the Rand devaluated - everything was extremely expensive. If the Rand devalues now we simply don't have the local skills to fill the gap.I am doing a recruitment drive and cannot fill basic positions in our company because the skills that we require don't exist in South Africa! Sad but true

      blip.noodlum - 2012-11-01 09:53

      Beneficiation of our raw materials is a good idea in theory, but our high costs of labour and our tiny domestic market means we just don't enjoy viable economies of scale. If we turned our own iron-ore into, say, cast-iron drain covers and cooking pots, we'd only sell about 100000 of each product per annum on the local market --- far too small to keep an iron foundry profitably viable. Our goods will sell for, say, R100 each if sold at cost price. If we ship 500 million tonnes of raw iron ore to China at the same time as we supply 10000 tonnes of ore to our own foundry, the Chinese foundries will produce those drain covers and iron pots out of our ore but produce it in such unimaginably huge quantities that they could ship back the identical drain cover and cooking pot to us and sell it over here at a cost of only R10. Chinese factories, after all, cater for a domestic Chinese market of over a billion people and only then, once they've met this huge local demand, do they need to find an export market! They've got what we can never have: economies of scale. So, if you're a South African consumer of iron pots or drain covers, and you have a shopper's choice of buying a R10 Chinese-made one or the identically-specified South African-made one but for R100, it's a no-brainer as to which one you'd buy. The SA iron foundry just wouldn't even last six months in the competitive global market. So, we do what we do best -- ship out ore. Here we still have a competitive advantage.

  • carl.v.rooyen - 2012-11-01 11:14

    Blip you cant' compare the States and China to us . The USA at the time produced their own oil and were not entirely dependent on imports. China as a consiquence of thier artificially weakened currency had many in proverty and only recently has there been enough momentum to start lifing the middle class. In SA we have a target of improving everyones life and China's model will not work here. I am not even mentioning their wages. As rightly pointed out in a global economy baring trade restrictions everything is mean reverting- its the cycles that are killing us. We need to address the underlying problem and that is productivity in our country so that we can compete on a global scale. Weaken the currency and the deficit may decrease however inflation will take away all those gains and the cycle repeats itself. Look at South Koreas model for a planned economy - thats a model we can look at. If you want to look at what happens when it goes wrong look no further than Argentina and Brazil- one defaulting on their loans and the other having to introduce a new currency. Work on the fundimentals and stop playing games.

      blip.noodlum - 2012-11-02 00:07

      The rules of economics are as universal as the law of gravity. We cannot escape the effects of supply-demand causes just because we have different local conditions to USA or China. Besides these two countries themselves have radically different local economic circumstances, yet are engaged in a death struggle with each other. China under Mao and his "cultural revolution" attempted to focus on self-sufficiency in food-production and forced workers out of city factories into rural farms. And it was a catastrophic failure of misdirection of their natural economic advantage which is manufacture. Since Mao died, China went into manufacture (which they're excellent at) and have become the world's manufacturer. 95% of the components of the computer or smartphone you're looking at was made in China. And because China is doing what it's economically good at rather than what some mad ideologist demanded they ought to do because it might be better ideology, it is thriving economically. The same applies to Brazil -- from an economic basket-case a generation ago to having just overtaken Great Britain to now having the sixth largest economy on earth. It is fed by a big local market with a population of close to 200 million. It is growing at a real 5% p.a. which is tremendous in the global slowdown. And, guess what, their currency, the real, is a weak currency. South Korea's economy isn't a "planned economy". That term is used to describe communist economies like North Korea or USSR.

      blip.noodlum - 2012-11-02 00:31

      South Korea's government in the 1960-1980 period decided to assist via subsidies in a clearly-targeted way what the Koreans can do better than other competitors -- and that, like Japan, was based on heavy engineering and shipbuilding. Individual super-entrepreneurs like Chung Ju-yung (founder of Hyundai) built vast business empires with government guarantees (rather than actual cash) and by winning contracts for jobs he knew nothing about. He won a shipbuilding deal to build 4 ships, but didn't even have a shipyard. So he built the world's biggest shipyard on the back of his contract for those 4 ships, and in ten short years Korea became the largest shipbuilder by gross tonnage and by number -- a third of all new ships today are Korean-made. And Chung started off in life in business as a teenage car mechanic.

  • TheSingingHorse - 2012-11-01 11:19

    I have just bought something online from the UK. I paid approx half the rand value for the same item in SA. This is despite the current weak rand.Interest. I am sure this bodes well for local productivity and employment and a sign of this come. But hey , for those that wish, enjoy the great local rip off.

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