The weakening of the South African rand is putting local manufacturing companies in the corner amid fears some firms could fold as cheap imports flood the market, pushing out locally-manufactured goods.
Zimbabwe is South Africa’s major trading partner. The troubled southern African country relies heavily on South African products after industry collapsed owing to more than a decade of economic malaise.
Economist Brains Muchemwa said owing to the ongoing depreciation of the South African rand, Zimbabwe has become a strategic and lucrative market for South African products as they become more affordable.
“Resultantly, Zimbabwean companies whose products are destined for the local market are facing serious competition from cheap imports. Considering the fragility of domestic companies’ balance sheets on account of septic gearing levels, it is quite possible that a number of local companies are going to be forced into tight corners and possibly bankruptcy,” he said.
The rand has been on a free-fall for some time, but reached an all-time low last week at R14 against the US dollar.
Economist Kipson Gundani said the primary effect of the weak rand was making South African goods more price competetive in US dollar terms.
“This is obviously not favourable for us especially given the high trade volumes between Zimbabwe and South Africa. Since South African goods will be price competitive on the domestic market and without a corresponding tariff increase it will hurt the domestic producers at the shop shelf level. There is potential market loss for domestic companies. But this can be mitigated by the recent tariff increases,” Gundani said.
However, some analysts say local companies should shift from one currency to the other, depending on the situation to avoid effects of the rand depreciation. While the rand fall badly affects local exporters, importers are benefitting a lot. Some company executives say Zimbabwe must just officially switch to the rand to manage its volatility as dollarisation has its downside.
The rand marginally recovered against the dollar on Monday after the greenback sagged ahead of a slew of data due this week, but remained in the sell-off territory as heightened US rate hike concerns weakened appetite for risky assets.
But on Monday the rand was 0,45% firmer to R13,2495 against the dollar, extending its recovery after tumbling to an all-time low of R14 last week. “The movement in the rand was offshore, there’s definitely no improvement in the sentiment there but nothing substantial heading into the Fed meeting in a couple of weeks,” said Christie Viljoen, senior economist NKC African Economics.
“I think it’s going to seesaw for quite a while.”
Traders have warned that the South Africa unit’s gain will be short-lived ahead of Tuesday’s Chinese purchasing managers’ index figure, and most importantly, Friday’s payroll data in the United States.
China lingers as a major concern for emerging market currencies like South Africa as it is the largest trading partner for Africa’s most industrialised economy, consuming its commodities.
While the continued weakening of the rand has added some lustre to the value of gold sales for South African miners, it has done little to lift the long-term gloom shrouding the sector.
Harmony Gold welcomed the weaker rand, as it meant higher earnings for every kg of gold sold in dollars, said Marian van der Walt, the company executive for corporate and investor relations.
“Though the increase in the rand-to-kilogram gold price provides a welcome relief to us, our focus remains on increasing our margins through an increase in production.”
South Africa is among developing economies that benefitted as investors shifted their funds in the wake of the 2008 global financial crisis investors to relatively safer and rewarding markets.
Owing to investors placing their monies in emerging countries, beneficiary countries’ currencies became stronger.
But 2014 saw some improvement in the economies of developed countries. For instance, the US — the biggest economy in the world — had taken the stance to stimulate its economy through the Fed’s purchase of government and other securities to pump money into the system whilest at the same time maintaining a low interest rates regime.
But things have since changed. Employment figures are on the rise and the country’s macroeconomic fundamentals are back on track: a stronger US dollar, good employment numbers and the possibility that the Fed will increase interest rates again.
With a big, stable and trusted economy, the possibility of a rate hike is all that is needed to see FDI redirected from emerging economies back to the US. Fund managers have also dumped commodities, opting for the dollar.
When investment leaves the country, it means demand for a currency declines.
Zimbabwe on the other hand does not have a currency of its own, a development that has opened up the economy to the vagaries of exogenous shocks and risks associated with the use of another country’s currency. Because the troubled country is not in a monetary union with the US, the fed generally pursues policies that benefit their own economy.