Our economy must grow faster

2013-06-02 14:00

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This week saw the rand dipping as low as R10.30 to the dollar, despite President Jacob Zuma’s efforts to calm economic fears. Thandeka Gqubule quizzed Finance Minister Pravin Gordhan on the reasons.

Should South Africans be scared after the performance of the rand this week?

A certain degree of adjustment or depreciation in the rand was necessary and expected.

However, when currencies adjust, they tend to overdo it. It hardly ever happens that adjustment is smooth and orderly.

In that sense, a degree of overshooting is normal. As policy makers we are obviously concerned about excessive volatility in the currency.

What does it mean for ordinary South Africans?

It will raise the cost structure for South African firms and it could hurt our competitiveness (see graphic for food-price hikes since 2008).

Will this lead to an increase in petrol and food prices?

When the depreciation is too fast and there is a lot of volatility, we do get concerned.

People who are supposed to be doing business with South Africa – making investments, buying our bonds – tend either to hold back on investing or take precautionary decisions.

This is the reason President Jacob Zuma tried to speak to the nation, in particular people involved in the mining sector, which is the area where we think the source of negativity is concentrated.

What is causing all this?

There are international and domestic factors involved.

The three domestic factors are, firstly, while the South African economy was quick to rebound after the crisis, it has not been growing fast enough relative to other emerging markets, nor enough to deal with South Africa’s massive challenges.

We can achieve higher growth, but that requires us to implement our plans – the National Development Plan and other plans – diligently and with speed.

Further, rising costs and wages, combined with falling demand and commodity prices, are producing a challenging environment for the mines, especially when not matched by increases in productivity.

Lastly, the negative narrative within South Africa and the resultant negative perceptions around the mining sector have not helped.

A global factor is that when governments in developed countries, especially in the US and Europe, injected huge amounts of money into their economies to refloat them, some of the money came into South Africa and led to the rand becoming overvalued by 15% or so.

As the Reserve Bank points out, the rand’s depreciation is also partly explained by the recent strengthening of the US dollar and the decline in commodity prices.

The softening in the demand for commodities has seen prices come down as countries that normally buy these commodities are facing their own domestic challenges and are not buying as much as they used to before the 2008 recession.

The decline in volumes sold and the fall in the prices of commodities erode the profitability of mining companies.

This makes their shares unattractive.

Those who hold shares sell them. Growth is improving in the US; real estate prices are firming and employment data, although mixed, suggest better prospects.

This all puts pressure on the rand.

How food prices have increased over five years

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