Rand and the economy: Why a strong rand is good for SA business

February 9th, 2011 by Brian Kantor

The notion that the strong rand makes life tough for SA mining enterprises is belied by the earnings now being reported by the mining companies. Anglo Plats just reported headline earnings per share of 1 935c in 2010, up from 289c in 2009, an increase of 570%. The higher US dollar price of platinum metals clearly more than made up for what a stronger rand took away.

To read the story with graphs and figures, continue reading the Daily View: Rand and the Economy: Why a strong rand is good for SA business

We show the JSE earnings cycle updated to 8 February below. Reported JSE earnings per share are now growing very strongly.  JSE Resources earnings and JSE Alsi earnings are up by 23% on a year before. JSE earnings per share in US dollars have grown by nearly 30%, something that will be well appreciated by foreign shareholders. Earnings seems set fair to increase significantly further in the months to come.

Clearly something other than the strong rand has been at work here. The rand averaged R7.28 in 2010 compared to R8.42 in 2009, an increase of nearly 15%.  What is at work on JSE earnings is higher US dollar metal, mineral and commodity prices. These prices have responded strongly with the global economic recovery and have strengthened the rand accordingly.

Had the global economy not recovered, commodity prices would have been lower and the rand weaker. The combination of a weaker rand and lower commodity prices would not have helped SA exporters very much. The weaker rand would not have compensated their top and bottom lines for the weakness in underlying demand for resources and prices.

And the weaker rand would have harmed the domestic spender. It would have meant more inflation and higher interest rates and thus much more subdued domestic spending. The motor manufacturers and their component suppliers, who account for the largest share of the domestic manufacturing sector, would not (without the assistance of a stronger rand) have benefitted from the strong recovery in the SA demand for new vehicles. Nor, in the absence of the global economic recovery (the source of rand strength) would they have been able to export as much as they are now doing.

The strong rand has been very good news for the motor manufacturing sector as well as for motor dealers. Could not the same be said of manufacturers who depend on their domestic customers and especially those shielded by distance and the costs of transporting goods from their offshore competition? One thinks of the bakers and the brewers and the meat packers in this regard.

Clearly with a strong rand imported goods of all kinds do become more price competitive on the domestic market. But the greater size of the domestic market, stimulated by lower prices and interest rates, surely can help make up for keener prices.

The reality is that local producers should not expect to benefit from a strong global economy and a weaker rand. They cannot easily have it both ways unless SA shoots itself in the foot and adopts economic policies or intentions for economic policy that frighten away foreign investors and lead to a run on the rand.

SA specific risks can weaken the rand and provide a temporary profit margin windfall for exporters. The windfall is temporary because more inflation soon follows the weaker rand to squeeze margins. And organised labour will soon add to the pressure on costs on margins as inflation picks up.

Businesses in SA should not hope for an increase in the risks of doing business in South Africa reflected in a weaker rand. They should rather wish for the benefits of a stronger rand that reveal a strong global economy and sensible economic policies for the long run. They should not hope for windfalls from currency weakness but rather learn to operate profitably in a low inflation world that can only materialise with rand stability. This is what successful businesses in permanently low inflation economies manage to achieve. They do not look to currency weakness as a business opportunity. SA business should follow their example and appreciate the opportunity to do so that a stable rand provides. Brian Kantor


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