The rand, one of the worst-performing emerging-market currencies last year, started 2016 even weaker after the US Federal Reserve raised rates in December. Global investors remain unimpressed by South Africa’s growth. It temporarily broke the 16.9 rand to the $1 barrier in early January (reaching 16.96 rand on January 11) and looks poised to breach 17 rand soon, well below its previous weakest level set in December 2001.
Other challenges to business continuity compound the foreign exchange situation. South Africa’s ranking fell from 69 to 73 in the World Bank’s Doing Business 2016 report, with fundamental and infrastructure-related impediments weighing the most on the ease of doing business.
Domestic business sentiment also remains worryingly low. The Business Confidence Index produced by the South African Chamber of Commerce and Industry slipped to a record low of 79.6 in December 2015, a drop of 3.1 index points compared with 82.7 in November 2015 and 8.7 points compared with December 2014. The December 2015 reading brought the 2015 annual average down to 86.4, the lowest annual average since 81.3 in 1993.
In particular, sentiment in the manufacturing industry has been on a downward trend as producers struggle with lower demand and inadequate electric supply. The Markit/Standard Bank PMI fell from 49.6 in November to 49.1 in December, staying below the 50-point mark that separates expansion from contraction. Conditions in the industry will remain weak in the near term, as survey respondents indicated that they continued to cut jobs.
Meanwhile, an unpopular political move has led to domestic turmoil. In December, President Jacob Zuma unexpectedly fired Finance Minister Nhlanhla Nene and replaced him with former Merafong mayor and parliamentarian David van Rooyen. Van Rooyen had never worked at the Treasury before, in sharp contrast to Nene, who was well-known to the business community and well liked. The fiasco surrounding Nene’s firing led to a public backlash, highlighting the risk of civil disorder and further declines in sentiment in response to avoidable policy missteps.
No official or clear explanation was provided for Nene’s sacking, although the president’s office announced that Nene would be reassigned to a “strategic post.” Businesses and markets reacted unfavorably to the decision to remove Nene. The rand, already weak, depreciated immediately following the announcement and sank to a new all-time low.
Billions of dollars were wiped off the bond and stock markets as investors lost confidence in the government and the Treasury’s ability to steer the economy towards better growth. As market turmoil intensified and public displeasure became obvious, Zuma backtracked and reappointed Pravin Gordhan, who was finance minister from 2009 to 2014, as the new finance minister. Indicators of market sentiment recovered almost immediately.
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.