The rand continued to yo-yo this week, after its dramatic plummet against the United States dollar last Friday, with analysts arguing that the currency remains vulnerable to further weakening, particularly as domestic risks such as fraught labour relations in the mining sector, the ailing current account deficit and gloomy growth show no signs of letting up.
After falling to more than R10 to the dollar on Friday, the rand pulled back to about the R9.80 mark, only to spike back over the R10 mark by midweek.
A "perfect storm" of international and domestic factors had hit the currency, said Mohammed Nalla, the head of strategic research for global markets at Nedbank Capital, and despite the recent consolidation the fundamental outlook for the currency remained poor.
Internationally, indications that the US Federal Reserve could potentially start to slow quantitative easing raised the risk of portfolio outflows from emerging markets, particularly bond flows, according to a research note from Nomura.
South Africa is particularly vulnerable, given its worsening current account deficit, which had been funded through investment flows into local bonds and equities.
The trade deficit, a major contributor to the current account deficit, widened to R15-billion according to information from the South African Revenue Service last week, while the cumulative trade deficit for 2013 reached R57.01-billion compared to R36.62-billion in 2012.
Along with speculation the US Federal Reserve could begin "paying down its stimulus", recent increases in Japanese bond yields had impacted the global carry-trade, seeing a sell off of emerging market currencies, which contributed to the initial weakness seen in the Rand, according to Nalla. Bad news on the domestic front, however, including last week's poor growth figures, were working to sustain this "negative momentum".
In its June monetary policy review, the Reserve Bank noted that following weak economic growth figures – recorded at 0.9% for the first quarter of 2013 – it may have to revise down its May growth rate projection of 2.4% at its next monetary policy committee meeting.
According to Rob Spanjaard, a director at Rezco Asset Management, the weakening of the rand in May, estimated at about 6.7%, was in line with other emerging currencies such as the Brazilian Real, which declined about 5%. Things had started to normalise in the US, which was resulting in a reversal of capital flows from emerging markets.
According to Spanjaard, the US was forecast to grow at rates higher than Brazil, which was set for between 1% to 2%. South Africa had similarly lacklustre growth estimates. The rand had, however, performed far more poorly than other emerging market peers over the past year, weakening by an estimated 17%. This was driven by domestic fundamentals, notably the current account deficit.
On an annualised basis, the deficit required R200-billion of foreign investment inflows, or about R4-billion of foreign investment in bonds and equities a week.
Given this reliance on foreign investment, it was crucial that the South African authorities created a more business-friendly environment and refrained from treating business like a "criminal class", Spanjaard said. This was particularly important in the mining sector, given the critical role it played in the economy.
Ongoing unrest in the mining sector has fuelled poor business confidence and made investors jittery.
Tension between the National Union of Mineworkers (NUM) and emergent union the Association of Mineworkers and Construction Union persisted this week, when attempts at negotiation led by Labour Minister Mildred Oliphant broke down earlier in the week. The perception that the state is siding with its alliance partners in the NUM has not helped circumstances.
To add to the ongoing woes of the sector, an unprotected strike began at Impala Platinum in Rustenburg, with a reported 3 000 workers downing tools on Tuesday. Glencore Xstrata meawhile fired 1000 workers for embarking on an unprotected strike, according to Bloomberg.
Oliphant reportedly suggested that the government would consider introducing a "peacekeeping" force to stabilise the mining industry.
Interventions to consider
But Nomura strategist Peter Attard Montalto suggested there were a number of other interventions the government could consider to reassure the markets and investors.
These included the announcement that "restructuring of the mining industry was needed, that both mining companies and unions had to compromise to secure the future of the industry". The state could support phased job losses, but must commit to the restructuring now, he said, and it could help to find jobs elsewhere in infrastructure projects, agriculture and other sectors requiring similar low-skilled jobs.
He also called for the "reform of collective bargaining and the liberalisation of mining-shaft-level collectivisation agreements to liberalise labour policy and allow greater democratisation in the sector".
Other reforms could include the direct integration of workers into management forums that are parallel to, but independent of, the collective bargaining and union recognition processes, as well as much stronger direct lines of communication and reporting "from the rock face up to management".
Implementing the reforms promised after Marikana would be positive, he said, particularly those related to housing and working conditions.
In the platinum space, the state should act as a "price giver" to restrict supply and boost the price, "so allowing time to restructure the industry and fund investment in other jobs growth areas".
A chance to fix what's wrong
The current rand weakness is proving a welcome shot in the arm for platinum mining companies, according to Peter Major, head of mining and resources at Cadiz Corporate Solutions. Between 65% and 90% of local producers' costs are rand based.
Over the past year, Anglo Platinum's costs were split between labour (46%), utilities such as water and electricity (12%), stores (26%) and sundries (15%). But the company's large open-cast Mogalakwena mine, which produced 13% of its revenue and more than 25% of profits, skewed labour as a percentage of costs, he said.
Labour costs for other major producers such as Impala Platinum and Lonmin were more than 50%. Since the Marikana killings last year, the rand price for platinum is up 25% and 50% for palladium, Major said.
At Wednesday's price of $1 500 an ounce for platinum and $750 an ounce of palladium, the two metals respectively accounted for 66% and 17% of local platinum mines' revenues.
"With a weak rand, most of our platinum mines are probably managing at current dollar PGM [platinum group metals] prices," said Major. But if the dollar PGM prices fell more than 5%, the rand would probably weaken further, helping to soften the blow.
"The weak rand obviously buys the government and mines some time," said Major. The state, labour and mining companies had to use this opportunity to "fix what's wrong", he said, which included allowing the mines to implement more efficient work practices, wage structures and rationalisation.