The rand plunged to a four-year low this week
As the rand plunged to a four-year low this week, reaching R9.61 to the dollar on Tuesday, analysts say that pressure on the currency is unlikely to abate in the short term.
Even though it had recovered slightly to R9.56 by Wednesday evening, the currency was faring significantly worse than its Brics partners, and the government bond market reflected its relatively poor health. Statistics on investing.com showed that South African 10-year bond yields had fallen by 1.31% on Wednesday evening from a month previously.
By comparison, the government bonds of Brics partners were in a healthier position. Russian bonds for the same period had increased 1.35% and those of India had increased 0.18%. Brazilian bonds had fallen, but at a tempered rate of 0.6%. The rand was flagged as the worst-performing currency against the dollar in 25 emerging market currencies monitored by Bloomberg in May.
Along with the strengthening dollar, analysts almost unanimously blame the devaluation on labour unrest. "In this regard, the platinum mining industry finds itself in a perfect storm, with a pincer between sharply rising costs and reduced revenue," said Dr Azar Jammine, the chief economist at Econometrix.
The platinum sector has been dogged by decreased European demand, imminent restructuring at Impala Platinum and Anglo Platinum's announcement that 6 000 of its workers would be retrenched.
With sector wage negotiations about to commence, infighting between rival unions, the National Union of Mineworkers (the NUM) and the Association of Mineworkers and Construction Union (Amcu), has led to several wildcat strikes, including a two-day stoppage at the beleaguered Lonmin mine last week, nine months after 44 people were killed there in violent strikes spurred by inter-union conflict.
Striking miners
Adding to the melange, ten striking miners on a coal mine were reportedly injured on Tuesday after being hit by police with rubber bullets. Against this backdrop, investors were alarmed to hear the NUM announce its intention to negotiate for a 60% wage increase for its members, confirming predictions that inter-union rivalry would lead to radical posturing and unreasonable demands made by both parties during the negotiation season.
"The problems in the labour market in South Africa's mining sector have increased operational costs, as has substantial government resistance to proposed retrenchments to rationalise the workforce in the face of rising costs. Not least [affected] are wages, given the low degree of mechanisation and high level of labour intensity compared to international models," said Investec group economist Annabel Bishop.
And, said Bishop, the "inability to price risk for South African corporates … is not limited to the mines. Labour rigidities, from difficulties in hiring and firing [and] very low levels of flexibility in wage determination to low productivity levels compared to pay levels internationally, prevail. Indeed, the World Economic Forum ranked South Africa as the worst country in the world in terms of co-operation in labour-employer relations, even before the Marikana tragedy occurred."
Finance Minister Pravin Gordhan warned on Tuesday that labour unrest in the mining sector had placed South Africa at an economic crossroads. "If we do not resolve our labour relations challenges, we will see deteriorating confidence, job losses, and business failures," he said. He added, however, that he believed the markets were "overreacting" to the threats associated with the unrest.
But whether they are overreacting or not, foreign money is flowing out of the local bond market. On Tuesday, bond yields reportedly went up from 6.6% to 6.9%, due to investors pulling back. The outflow of funds from foreign-owned bonds are leading to a greater current-account deficit. The result is what FNB's chief economist, Sizwe Nxedlana, refers to as a "twin deficit".
Jammine explained the knock-on effect: "The rand has been adversely affected by these developments, not only because of the damage being inflicted on potential investment in South Africa's platinum mining industry, but because of the cost to economic growth caused by the loss of export revenue."
The trade deficit
According to calculations by Econometrix, a total halt to platinum production would reduce exports by 1%. The trade deficit would increase by about R8-billion, or 0.3% of gross domestic product.
"An increase in the trade deficit results in a commensurate increase in the current-account deficit, necessitating an increased dependence on foreign capital inflows to accommodate the shortage of foreign exchange [between imports of goods and services and exports]," he said. "This increased dependence on foreign capital inflows in turn makes the rand vulnerable to further depreciation in the absence of those inflows being sufficient to compensate for the shortage of foreign exchange."
Several analysts speculated that the unrest increased the possibility of the country facing a further fiscal credit rating downgrading. However, the Mail & Guardian reported that Moody's quelled rumours of a downgrade last week, saying that the September downgrade was based on a 12-18-month evaluation.
According to Stephen Meintjes, the head of research at investments company Imara, the devaluation of the rand was inevitable.
"The rand was benefiting up until a year ago from the general search for yield," he said. "The market tended to overlook some of the problems that were not being adequately addressed. This is a belated recognition of those factors." Bishop has pitched a 45% probability that the actual rand-dollar exchange rate will stay at R8.94 for the quarter.
Over the next six months she expected it to reach R9.00 before retracing to R8.70 by the fourth quarter of 2014. The projection is based on 3% economic growth this year rising to 5% by the end of the forecast period.
In Meintjes's opinion, South Africa needs to cure its labour woes in a way that does not scare future investors away before the rand retraces. "It's going to take a lot of good work if it's going to get below R9 [to the dollar] again. Much of what is being done now seems designed to scare investors away for good," he said.
SA losing out on the internet boom
The high cost of broadband internet access, low internet penetration and slow internet connectivity is holding South Africa back, according to Stanlib chief economist Kevin Lings.
In a research note released this week, Lings says several global studies have found compelling links between high-speed internet access and significant economic growth. He pointed to research by the University of Munich, which found that after introducing broadband internet countries achieved 2.7% to 3.9% higher gross domestic product per person. It also found that every 10% increase in broadband internet penetration brought a 0.9% to 1.5% increase in the growth of GDP per person.
A report by the McKinsey Global Institute, released in 2011, revealed the internet was a major driver of economic growth in major economies. It found that in the 13 countries examined by McKinsey the internet had "contributed 10% of their growth over the past 15 years, and 21% of their growth in the past five years", Lings says.
The McKinsey research also showed that companies using the web grew more than twice as fast as those with a minimal web presence, while internet-friendly companies created more than twice the number of jobs as companies that don't make use of the internet.
The internet's economic impact varies from country to country, even among nations at a similar level of development, he says. The web represents 6.4% of GDP in Sweden, 5.4% in the United Kingdom, 3.1% in France and 2.7% in Canada. The role of the internet is far lower in the Brics (Brazil, Russia, India, China and South Africa). It makes up 2.6% of GDP in China, 3.2% in India, 1.5% in Brazil, 0.8% in Russia and a paltry 0.3% in South Africa.
South Africa does not compare well with some of its African country peers either, he says. Its internet penetration is at 17.5% of the population, lower than that in Kenya, even though South Africa has a larger population. The majority of Africa's internet users are concentrated in Nigeria, Egypt, Morocco and Kenya, which have a combined internet penetration of 32.5% and account for almost 64% of all web users on the continent.
South Africa's internet speeds are also staggeringly slow. The global average peak internet connection speed has been recorded at 16.6Mbps in Q4 2012, he says, while in the United States the average peak connection speed is 31.5Mbps.
South Africa's average peak connection speed is "a very modest and disappointing" 7.1Mbps in the same period. It is ranked as having only the 25th fastest internet in Africa and is ranked 120th in the world. "It is clear … South Africa is missing out on a major growth opportunity," says Lings.