Manufacturers are ”bleeding” because of the strong rand, which should depreciate to 7,50 to the dollar by the end of next year, the University of Stellenbosch’s Bureau for Economic Research (BER) said on Wednesday.
The chief economist at the BER, Pieter Laubscher, said at a briefing in Johannesburg that South Africa cannot sustain the current account deficits brought on by the rand, which is currently trading around R6,70 to the dollar and R8,70 to the euro.
”At R6 to the dollar and R8 to the euro, the currency is simply too demanding for producers, leaving little option but to close down loss-making production, including the accompanying employment losses,” Laubscher said.
”At the moment the industry [manufacturing] is bleeding. Our call therefore remains for a adjustment in the value of the rand over the short term … to R7,50 to the dollar and R9,60 to the euro by the end of next year.”
Laubscher said the effect of the strong rand on South Africa’s balance of payments was likely to cause lasting damage to its growth performance.
”The USA economy can sustain huge current account deficits, but not the South African economy, with a proxy currency and capital market for speculative investment purposes and import penetration running close to 30%.”
Laubscher said the weaker currency, combined with demand pressures in the economy — such as accelerating credit and monetary growth — will cause some acceleration in domestic inflation. Higher energy prices will also tend to push prices up.
He said the BER expected CPIX inflation — consumer inflation excluding mortgage costs — to average at 5,6% in the first quarter of 2006 and 5,7% in 2007, causing a hike in interest rates of 1,5 and two percentage points.
The CPIX rate is currently 3,8%.
”Inflation is expected to recede again as the economic growth momentum slows down in 2006/07 and allows a decline in interest rates again.”
Laubscher said it was vital for the manufacturing industry that the rand trade at more competitive levels.
Manufacturing accounts for 20% of South Africa’s gross domestic product, but contributes more than 50% to export revenues.
”The option of de-industrialisation is simply not available to South Africa. A vibrant manufacturing export industry is critical for South Africa’s longer term economic growth and survival.
”A currency not aligned with a country’s production possibilities and spending orientation risks serious imbalance and carried the seeds of future downside financial volatility, impacting negatively on inflation, interest rates and real economic growth and employment creation.”
The expected weaker rand was however, likely to stimulate a recovery in manufacturing and other exports.
”The expected adjustment in the value of the rand exchange rate is likely to impact on the composition of growth going forward,” Laubscher said.
”We expect a significant recovery in the export sector over the medium term.” – Sapa