SA Quagmire Plunges the Rand

Posted by on Nov 6, 2013

SA Quagmire Plunges the Rand

On May 30th, soon after President Zuma addressed a hastily arranged press conference to deal with South Africa’ falling foreign exchange value, the currency plunged by another 2% breaking through the key level of 10 rand per US dollar- trading at R10.07/US$ at the time of writing! That was a shock to the economy and a culmination of a process questioning the president’s leadership and his approach to the complex issues of macroeconomic management. Whilst the President’s speech did not cause the rapid fall in the currency value, his cabinet’s inability to deal with the sophisticated structural issues of the SA economy has been the root cause of the steady decline in the value of the SA currency over the past few years. Despite the unprecedented and colossal “quantitative easing” in the global financial markets, the SA currency today is over 30% cheaper than when the Zuma administration took charge. In effect, in global currency terms, South Africans collectively are at least 30% poorer today than two years ago, and their average welfare has fallen accordingly.


The SA rand has been sliding for the past few years, after recovering from its rapid depreciation in 2009 which followed the sharp contraction in economic activity due to the global “great recession” of 2007/2008. The primary technical factor contributing to SA currency depreciation has been the steady fall in the country’s export earnings. In addition to the unfavourable global economic conditions and the fall in the price of commodities, the SA economy has been shackled by an interrelated set of structural bottlenecks. The shortage of energy, inadequate rail and export logistics and a perilously inefficient, and at times corrupt, public sector have combined to undermine the export sector and its ability to secure foreign earnings. Meanwhile, imports, especially those items needed for country’s infrastructure expansion programme, have continued apace. Consequently, a growing gap has emerged in the current account of the balance of payments, exceeding 6% of the GDP. In the recent past the shortfall in balance of trade was made up by the constant inflow of capital into South Africa’s equities and the bond markets.


The political economy events of the past year, however, have weighed heavily on the propensity of the domestic and foreign institutions and investors to buy exposure to South Africa and hence on the currency market. To begin with, over the past few years we have had a rising level of social discontent due to the government’s inability to deliver quality services to the communities. The average number of daily service delivery community protests has risen sharply and steadily over the period. In August 2012, a mix of labour relations issues within the mining sector, ultimately led to the tragic massacre of 44 mine workers by the police at Marikana. This marked the beginning of an ongoing violent disruption within the mining sector.  As the GDP contracted and tax revenues declined, the government’s fiscal position in the meantime deteriorated. This aggravated a pattern which had been building up since 2008. These trends together with a steady decline in the overall confidence level within the economy culminated in October 2012 of the first ever downgrade of the country’s sovereign credit rating since the inception of the new democratic dispensation in 1994.


This vicious circle of political economy trends was further exacerbated by the ongoing infighting within the ruling Tripartite Alliance (ANC, COSATU and SA Communist Party). Meanwhile, the continued workplace disruptions in the mining sector, and to a lesser extent within the agriculture sector, undermined production and exports. General business confidence was gradually eroded and the government continued to underplay the significance of the circumstances for growth, export earnings and the overall stability of the macroeconomic balance.


Whilst since mid- 2012 the dominant mineworkers union, i.e. the National Union of Mineworkers (NUM), lost many members and a new mining and construction workers union emerged (i.e. AMCU), a few senior government ministers exacerbated the situation by taking partisan positions in favour of NUM thereby aggravating the tense industrial relations within the mining sector. The upshot of it all is a considerable fall in export earnings in the short term, a collapse of confidence in the investment community, and a sharp fall in capital inflows- all culminating in a run on the rand in the second half of May 2013.


It is common knowledge that in times of instability and heightened uncertainty, the financial markets overshoot. This is further facilitated by the fact that the rand is one of the most liquid markets in amongst all emerging economies. The fact that the government has not yet (at least by the time of writing) come up with a credible policy response to deal with the underlying structural factors suggests that this instability is bound to continue for a while. Worse still is the possibility that South Africa’s global credit rating may be downgraded again. With that possibility on the horizon, the rand is bound to remain under pressure for now.