The Weakening Rand Can Start an Industrial Revolution

The depreciation of the rand presents not only bad news but also the good although the stage of harvest will follow a tumultuous period of changes within the country.

The sharp and quick depreciation of the South African rand against the US dollar and a couple of other major currencies in the recent days has caused a lot of discomfort among concerned locals, with some calling for the head of the president and his political party the ANC, and some hailing the Minister of International Relations Naledi Pandor for her swift reaction in an attempt to try and put out the storm that had caused such an unsettling slide of the currency that saw the USD/ZAR rate cross over the never before seen R19/$1 mark. Amid an on-going war between Ukraine and Russia, the US ambassador in South Africa Reuben E. Brigety claimed that South Africa had supplied Russia with arms which were loaded onto and ferried by the Russian cargo ship Lady R which was docked at the Simon’s Town Naval Base. When Pandor finally got the US ambassador to come out and pronounce in public that his claim was mere speculation that cannot be backed by proof, it was already too late for the rand.

Quite frankly the rand has been on a downward spiral since the advent of a democratic era in 1994. The nature of the incoming ANC government’s economic policy which was largely focused on distribution of proceeds from business activity as opposed to wealth creation resulted in expanded social programs which meant increasing government spending. With a small tax base that suddenly had to anchor bigger social programs, the government had to resort to borrowing among other methods of funding, which resulted in exponential growth in the GDP-to-debt ratio. The following decades’ economic scandals arising from the ruling ANC party only served to deter foreign direct investment from the country, and therefore leading to waning demand of the rand and exacerbating its weakening against major currencies.

As the weakening local currency forces a new reality on us, there are upsides and downsides of a depreciated currency. Investors with investments offshore will see good returns from their investments if overseas conditions remain favourable compared to the magnitude of depreciation of the rand. Exporters will reap higher profits as well compared to past periods because now when they get paid in foreign currency, they will have more money after converting it back to rands which will leave them in a better place to expand their operations and create the employment that is desperately needed in this hopeless time of our country.

The manufacturing sector of South Africa on its own cannot support the needs of the economy and the public, and if it becomes impossible to source and profitably use imported capital goods then new industries will have to be created internally and old ones strengthened as there would be no other choice. Under such circumstances, continued importation will raise inflation to record levels above current alarming rates, in turn giving the central bank incentive to hike rates even higher making capital expensive for companies and households who from time to time rely on debt to fund one thing or another. That will then lead to defaulting and the beginning of issues in the financial sector threatening an American-like crisis that is currently seeing several regional banks fail while economic participants remain uncertain about the future. Re-industrialising might be the one favourable way of keeping the country running and on a growth path whilst also creating expert skills among the population and giving opportunities to graduates with no jobs. That process will be very expensive and will need a lot of expertise, but that is where the government is supposed to come in – to support emerging industries and see to the realisation of their prospects. In the chance that we are unable to grasp what is happening and act accordingly, we await Armageddon.