South Africa’s exporters went into worry mode again this week as the rand hit a 42-month high against the dollar amid indications that the currency is set to strengthen even further.
Vintners, industrial companies, the dominant mining sector and nearly all exporting businesses have been reporting sharp losses this year due mainly to the rand’s ongoing strength.
”The rand has gained nearly 30% against the dollar this year after rising by 43% last year — unfortunately this is hurting the supply side of economy, especially manufacturing and mining, which are export-biased,” said Colen Garrown, an economist from Brait bank.
The rand hit a high of R6,55 to the dollar on Wednesday morning.
”The worrying news for exporters is that we are not expecting this trend to turn around, as commodity-based economies are improving globally,” he said.
South Africa’s public have benefited from the strong rand, with imported products, such as oil and maize, becoming cheaper, but they could also be punished, with many exporters threatening to shed jobs if the trend continues.
One of the latest to report rand-related losses is Barloworld, a group of industrial companies.
The group, with 45% of its profit earned outside South Africa, saw its net profit fall to R1,1-billion for the year ended September 2003 from R1,5-billion in the same period the previous year.
Su Birch, the chief executive of Wines of South Africa, the industry’s export body, said that for the first time in years sellers have been left with unsold wine.
”We are a growing industry, so the strong rand has not been that bad for us, but if this continues, we are going to see our market contract substantially,” she said.
Roger Baxter, an economist for the South African Chamber of Mines, said the rand’s continued strength could have disastrous consequences for the economy.
”For the whole mineral sector the estimated loss of rand export earnings could be as high as R20-billion,” he said, adding that an estimated 120 000 mineworker jobs are at risk.
”Considering the large social multipliers in the industry and the employment multiplier and given the country’s already large unemployment rate, the consequences of further job losses could be devastating,” he said.
The mining sector makes up 40% or R480-billion of the Johannesburg Securities Exchange and contributes 8,1% to South Africa’s gross domestic product.
Spot platinum reached a 23-year high of $774 an ounce on Wednesday, while gold reached a high of $400 an ounce on Wednesday, its best level in seven years, but Baxter said the high prices the metals were fetching was only making a slight difference to the industry.
”The negative impact [of the rand] on export industries has been considerable,” Baxter said.
”The problem is that despite slightly higher United States dollar commodity prices, the strong rand has led to the rand values of mineral sales declining significantly in 2003.”
The South African government has formed a partnership with big business to look at ways of managing the impact of the strong rand, but indications are that the currency, which reached a record low of R13,85 to the dollar in December 2001, has been undervalued for some time and could strengthen even further.
According to The Economist magazine’s Big Mac Index, a light-hearted guide to whether world currencies are at their ”correct” level in terms of purchasing price parity, the rand should be at R5,30 to the dollar.
The Swiss bank UBS calculates that the ”correct” level is an even stronger rate of R4,12 to the dollar.
Matthys Strauss, an economist from Absa, said the rand is benefitting from its safe-haven status and from being a commodity-based currency.
”Just more than 95% of the rands movement against the US dollar during the last two years could be explained by its safe-haven emerging market status, as well as its commodity-based relationship,” he said. — Sapa-AFP