New currency volatility threatens Zim industry

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ZIMBAbWE faces further de-industrialisation due to South Africas’s ballooning trade deficit with its major trading partners, which is threatening to devalue the rand, making South African imports into Zimbabwe more competitive, economists have warned.

Report by Clive Mphambela

Recent media reports from South Africa indicate, Zimbabwe’s southern neighbour faces a R200 billion current account gap in the second quarter of 2012 with analysts saying the deficit could widen to R300 billion by the fourth quarter this year. This raises fears of further decline in the value of the rand against its major trading currencies.

The South African rand has plunged to its lowest levels in over three years as investor nervousness over the ongoing labour unrest in the key mining sector that accounts for 9% of gross domestic product (GDP) pointed to a gloomy economic outlook for Zimbabwe’s largest trading partner.

South Africa’s current account gap has widened to 6,4% of GDP in the second quarter of 2012, whilst Moody’s Investor Service downgraded South Africa’s sovereign debt rating from A3 to Baa1, following the massive labour unrests in South Africa which led to the Marikana mine deaths.

South Africa relies on issuing foreign investment in stocks and bonds to finance its deficit and inflows have traditionally supported the value of the rand. However, negative sentiments in the last two months could lead investors to sell perceived higher risk emerging-market assets, including debt instruments, analysts say.

In an interview with businessdigest, University of Zimbabwe analyst Professor Ashok Chakravarti said since South Africa is Zimbabwe’s largest trading partner, any further weakening of the rand would have a negative effect on the country’s already struggling industrial sector.

“This is one of the main downside risks of the adoption of the US dollar as the primary currency of exchange in Zimbabwe. Any downside of the SA rand versus the US dollar will make SA imports into Zimbabwe even cheaper, and in the short-term this will have a serious negative impact on the ability of our struggling industrial sector to get back on its feet, increase production and employment,” Chakravarti said.

He added that part of the solution to this problem in the medium-term is to bite the bullet and make it government policy that the rand be the primary currency of exchange and circulation in Zimbabwe and not the US dollar.

Chakravarti said that all salaries, wages and prices in Zimbabwe need to be denominated in rand.

“If this is done any competitive or cost advantage we have will translate into a greater ability to penetrate the huge South African market,” he said.

He said the increasing instability in South Africa, especially labour problems in the mining sector, may have exposed the country and resulted in the sovereign credit rating downgrade by Moody’s from A3 to Baa1, putting pressure on the rand.

“The prospects for emerging market currencies, in particular the rand is not good. Firstly, because of the debt crisis there has been a general move away in international investment portfolios from emerging market debt and equity instruments. This has resulted in downward pressure on all emerging market currencies. The Indian rupee for instance, has depreciated by almost 20% in the past year.

A similar process will occur in South Africa.

Another Economist Brains Muchemwa had a slightly different view, despite agreeing that South Africa has been one of the biggest beneficiaries of Zimbabwe’s decade-long slowdown in economic activities.

“Zimbabwe has become a vibrant market for South African manufacturers from sweets, soap to toilet paper and thus millions of jobs and billions of rands in profits have been created South Africa out of its trading relationship with Zimbabwe,” Muchemwa said.

He said the recent inclusion of 12 South African government bonds on the Citigroup’s World Government Bonds Index is a massive milestone that will dampen the negative pressures largely associated with the recent Moody’s rating downgrade and therefore the rand is expected to remain strong, if not appreciating in months ahead.

Muchemwa argued that international investors have no other alternative exciting markets to invest in considering the ‘dead’ European bond markets where excessive quantitative easing have been driving bond yields to the floor.

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