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Bodhi Ganguli

Rand Weakness a Symptom of South Africa’s Deeper Challenges

by Bodhi Ganguli | Dun & Bradstreet Editor

October 26, 2015 | No Comments »

South Africa rand currency bills and coinsThe South African rand will be one of the worst-performing currencies in the emerging market (EM) heading into 2016.

The rand has already depreciated more than 12% against the US dollar since the beginning of the year, and it faces further downward pressure as the interest rate hike by the US Federal Reserve looms over the next few months.

The latest extended period of rand weakness began in mid-2014, when a bout of US dollar appreciation coincided with the bust of the commodity supercycle. From a high of around 10.5 rand per $1 in late July 2014, the currency has lost ground steadily, with only brief periods of respite. It came under renewed downward pressure following the Chinese yuan devaluation in August 2015 and associated market volatility. In late September it briefly fell below 14 rand per $1 — well below its previous weakest level set in December 2001.

While the slump in the rand reflects conditions in the global financial markets and lack of investor appetite for EM debt in recent months, there are more fundamental structural problems facing the economy, and these factors will continue to weigh on the currency in the near term.

Following 1.5% growth in 2014, Dun & Bradstreet expects real GDP in South Africa to be stuck at 1.5% in 2015, picking up only slightly to 1.9% in 2016. Tepid growth is expected to continue as the economy weathers FX risk, structural deficiencies, and low global prices for South Africa’s key commodity exports — gold and platinum. Both gold and platinum prices have slumped to multiyear lows in the last few months.

The composite leading business-cycle indicator compiled by the South African Reserve Bank fell by 1.6% on a month-to-month basis to reach 92.8 in July 2015; this is the lowest level of the index since November 2009.

Only two of the 10 component time series of the indicator increased in July, while the other eight decreased. The Manufacturing PMI released by the Bureau for Economic Research, an alternative leading indicator that focuses on the manufacturing sector, rose from 48.9 in August to 49.0 in September. But for the third month in a row, it remained below the 50-point mark that separates expansion from contraction.

On a positive note, after four months of tenuous negotiations, gold miners and workers’ unions finally agreed on contracts. As a result, the threat of disruptive strikes in the gold mining industry has now been all but eliminated.

Gold mining companies Harmony Gold Mining and AngloGold Ashanti reached three-year wage agreements with the National Union of Mineworkers (NUM), UASA, and Solidarity, which together represent the majority of employees at their mines.

Less than half of South Africa’s mines are now profitable. Given the recent drop in global gold prices, a strike would have further dealt a blow to the mining sector and weighed on GDP.

Work stoppage in the mining sector has been one of the major reasons behind South Africa’s latest slowdown. The country went through its longest platinum strike in 2014. Despite the wage agreement in the gold sector, the overall mining industry remains under pressure.

Major miners of platinum — South Africa’s other prominent export — are locked in a battle with the government and unions over plans to cut jobs in response to falling prices of platinum and rising costs. NUM claims that as many as 22,000 mining jobs are under threat; the government recently pledged to oppose the latest wave of job cuts.

South Africa’s failure to generate adequate electricity and the persistent power cuts and load-shedding that have plagued the country since the beginning of the year are affecting businesses, production, and even consumers.

Eskom, the state-owned power utility, continues to grapple with an aging, unstable power grid and inadequate generation that have forced the shutdown of several units for much-needed maintenance in recent months. This has resulted in frequent power cuts affecting both businesses and households and weighed down already weak growth prospects.

Late last year Eskom informed parliament that it cannot guarantee electricity supply security for at least another five years, until construction is completed on its two new coal-fired power stations at Medupi and Kusile. These plants will add nearly 10,000 megawatts to the power grid. In the meantime, however, power cuts are expected to continue and are part of a bigger downside risk to doing business in South Africa: the country’s aging and deficient infrastructure.

Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.

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