South Africa’s currency has been caught in a brutal pincer of dependence on weak European markets, exposure to slowing emerging markets, domestic turmoil and tighter US monetary policy. The Federal Reserve’s announcement on May 22 that it would eventually roll back stimulus was another gust of wind amid a cyclone for the South African rand. Like other emerging market currencies, the South African unit has had a torrid time of late. In January the currency stood at 8.75 rand to the dollar. On Thursday it hit a four-year low of 10.44, with little sign of an increase in exports that you might expect to see with a weaker currency.
“Since the beginning of the year, you will find that the rand, like the real of Brazil or the rupee of India, they have almost depreciated by about the same amount, about 17 percent,” said Daniel Makina, a professor at the University of South Africa. Funds are flying back to the United States,” he said. Hot – and cold – flows are nothing new to emerging markets, but against the backdrop of slowing Chinese growth, this has been a kick in the teeth. The desperation was evident when Finance Minister Pravin Gordhan in June urged the United States to take caution. “Manage your internal affairs and global affairs in a responsible way so that the negative effects on our economies are not as serious as they would seem,” he warned. It was in vain.
In South Africa credit has dried up, while imports – now more expensive – have continued to flood into the country. Higher petrol prices have forced consumer inflation above the central bank’s upper target of six percent. Coupled with slow growth, there are dark mutterings about a stagflationary spiral. South Africa – Africa’s largest economy – is only expected to grow at around two percent this year. Compare that with eight-plus percent growth forecast in neighbouring Mozambique. One destabilising factor has been ongoing labour unrest. Despite disputes often turning violent, the ruling ANC – which is closely linked to the dominant trade union federation Cosatu – has often appeared unable to step in.
“There are also domestic reasons why the rand is taking a knock. The auto and the mining sector and some other sectors are actually going through severe negotiations and there might be turbulence due to that,” said Nedbank economist Busisiwe Radebe. Some 30,000 auto workers have been on strike since the beginning of the week, crippling domestic production, while employees in the construction industry are expected to down tools from Monday. They are likely to be followed by workers in the mining and textile sectors. Such strikes are common at this time of the year in South Africa, when annual wage negotiations take place. But amid a slow economy and the tensions after the deadly mine strike last year at the Marikana platinum mine, which saw 34 strikers shot dead by police, investors are jittery.
“A lack of agreement in wage negotiations in the mining sector may have once again unnerved investors,” said Shilan Shah, an economist with Capital Economics. The outlook for the rand currently seems uncertain. “The prospect of the rand will be determined mainly by the outcome of the election in South Africa next year in April,” said Radebe.