Short run benefits from rand depreciation

Mr Nene

Mr Nene

Persistence Gwanyanya
The rand is in the throes of a bear run, which may last for a long time. Since 2012, the rand, along with a number of emerging markets currencies has generally been depreciating albeit at a fluctuating rate. In the early weeks of December 2015, Reuters reported that the rand fell to fresh 14-year lows against the dollar, and hit a record low against the British pound on account of softer global economic conditions. For the greater part of the week ended 30 December 2015 the rand has been oscillating around US$1: ZAR15, which is significantly lower than just below US$1:ZAR8 greater part of 2012.

The rand slide was exacerbated by the sacking of the Minister of Finance, Mr Nene from his post and his replacement by the little known David Van Rooyen on the 9th of December 2015. This move might have dented the confidence levels in the management of the South African economy.

In the outlook period, the rand rout is expected to continue as global economic conditions remain tough. The slowdown in the Chinese economy, declining global commodities prices and tightening of the US monetary policy will continue to weigh down the rand.

Rand weakness could be a boon for South Africa’s exporters. Rand depreciation makes South Africa’s exports relatively cheaper and thus more competitiveness on the international market.

However, the manufacturing sector recession, together with electricity shortfalls could limit the economic benefits from a weaker rand.

For Zimbabwe a weaker rand could have some short run benefits given the trade dynamics between the two countries. South Africa is Zimbabwe’s largest trading partner, with more than 60percent of Zimbabwe’s imports sourced from the former.

Zimbabwe can benefit from the pass through effect of a depreciating rand in terms of lower prices of South African imports to Zimbabwe.

Since January 2015, the rand has lost over 15 percent of its value against the US dollar meaning that South Africa products today are more than 15 percent cheaper in US dollar terms, ceteris paribus. Zimbabwe can capitalise on lower prices currently obtaining in South Africa and other emerging markets facing currency depreciation to import some machinery and equipment and retool its industry.

This augers well with the Minister of Finance’s extension of duty rebate on capital equipment imported by the mining, agriculture, manufacturing and energy sectors, for values of US$1 million and above, effective from the January 1, 2016. Capital equipment imported under the facility will not be liable to Customs Duty and VAT.

Given the high consumption rates in Zimbabwe, lower cost of consumer goods from South Africa will have broader economic benefits to the country. It is estimated that Zimbabwe consumes more that 80 percent of its GDP, with the bulk of these consumer goods imported from South Africa. As such a depreciating rand has a significant impact on country’s current account and thus its liquidity position.

A look at the country’s current account position will give us a clearer picture as to the likely impact of the depreciating rand on Zimbabwe.

The country anticipates a trade deficit of $2,9 billion in 2015 from exports of $3,4 billion and imports of $6,3 billion. This demonstrates a high dependence on imports which is a reflection of the ravaging effects of de-industrialisation. If Zimbabwe imports 60 percent of its products from South Africa assuming a 10percent depreciation of the rand against the US dollar would translate to $378 million savings on import bill, which is enough to meet the country’s maize import requirements at the moment.

There is a recent trend in the in the Southern areas of the country notably the Masvingo area where South African businesses are disposing of their products in Zimbabwe at very low margins and on even cost recovery basis. For South Africa there is economic logic in producing in falling rand and selling in the firming US dollar.

To earn more US dollars there is need to achieve higher turnovers and hence the rationale for charging low prices in the Zimbabwe market.

South African firms can afford to sell their products on cost recovery basis and earn their profit from weakening rand by merely holding the US dollar.

Assume a firm sells its product at cost recovery basis to achieve a monthly turnover of 5 times, which translate to 60 times a year, just to earn US dollars.

A 10percent depreciation in the rand against the US dollar would imply a 10percent increase in rand earnings over the 60 times stock is turned over in a year, ceteris paribus.

Thus it makes sound economic sense for South African businesses to sell their products at give-away prices in Zimbabwe and earn the US dollar and benefit from rand depreciation over time.

Whilst the South African businessmen will enjoy benefits of a weaker rand through capitalising on increased turnover and US dollar holdings, an ordinary person in Zimbabwe will benefit from lower prices of South African imports.

We hear that some imported products in the Masvingo area are selling at significantly less than their normal prices benefiting the rural folk.

Given the low disposal incomes and tight liquidity conditions currently obtaining, this is seen as a short term reprieve to the hard pressed Zimbabweans.

If South Africa can produce more competitively than Zimbabwe at the moment, it makes economic sense for it to produce for us now whilst we build our productive capacity. South Africa is ranked number 56 on the global competitive index compared to Zimbabwe, which is ranked number 124, meaning that it is by far a more efficient producer than Zimbabwe.

The strengthening of the US dollar on the other hand will continue to hurt Zimbabwe’s export competitiveness meaning that less revenue will be expected from exports. Given the precarious BOP position, Zimbabwe cannot afford to continue incurring excessive import bills.

The price effect of a falling rand is therefore seen as a reprieve to the country’s BOP position.

It is important to note that the benefits from falling rand will only be short term as South Africa’s manufacturing sector is under recession due to shortage of electricity which is impacting negatively on the mining and factory output and as slower growth in Europe and China erodes demand for exports.

If the current scenario persists the likelihood of build-up of inflationary pressures is high, which will erode the short term benefits from the depreciating rand.

The recent downgrade of South Africa by Fitch rating to BBB – and one level above investment grade and standard and Poor’s cut to the outlook on its equivalent rating to negative, which brought the country a step closer to junk status will weigh down on the country’s credit rating.

This could increase the cost of finance in South Africa, which is inflationary. South Africa will simply pass these inflationary pressures to Zimbabwe through higher prices as the latter is a captive market.

As such Zimbabwe should capitalise on the rand depreciation now and build up its productive capacity, improve its competitiveness to enable a strong take-off in the short run.

The country cannot continue to rely on South African imports as doing so means exporting more and more jobs to South Africa.

With a high unemployment rate hovering around 80 percent, the Zimbabwe economy is in dire need to reduce its jobless rate the same way this issue is top on the agenda of South Africa with unemployment rate of just 25,5 percent.

Over time the country should resuscitate its industry and be counted in the global arena.

  • Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer.
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