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Stronger Rand brings reprieve to local manufacturers - Analysts

31/01/2018
by Kelvin Chiringa
Business

The strengthening South African Rand raises green flags for Namibian manufacturers as import prices simmer down but the situation will likely be bad for the mining sector, analysts have said.

The Rand has strengthened considerably in the last two months with Treasury One (South Africa's premier treasury services company. The company's mission is to provide a broad range of best practice treasury services to organisations of all sizes and levels of complexity, and also to private individuals) defining it as the best performing currency in the period under review, buoyed by positive political developments in South Africa.

At the same time, economic policy in the United States has seen the greenback weakening and utterances by South Africa’s likely upcoming president, Cyril Ramaphosa in Davos saw the Rand shooting through the R12/US$ level.

 The situation spells good times for the local manufacturing sector, PSG research analyst Eloise Du Plessis opined.

“Manufacturers who produce mostly for the Namibian market will welcome the stronger Rand because it means the raw materials they need to import to produce are cheaper,” she said.

Yet University of Namibia economist, Dr. Kakuhaja-Matundu Omu is convinced a six-month period of sustained Rand strength can bring solidly positive results for the sector.

 “It could benefit those who import raw material from outside Sacu, they could import them cheaper and hence boost their production,” he agrees. 

However, red flags may start to appear “for the exporting miners, whose product is sold in US dollar terms, however, will now get less NAD for each US dollar they earn.”

“The mining sector is very important to the Namibian economy and is one of the biggest drivers of economic growth,” Du Plessis said.

Kakuhaja Matundu agrees, “On the other hand, if we have those exporting their goods to non-Sacu countries, they could see their sales/exports negatively impacted by the strong Rand.”

Will a strengthening Rand spell a positive manufacturing outlook as the business calendar begins?

 Du Plessis explicates, “Like I explained, it has different effects on different sectors. It could bring some relief to the Namibian consumer if retailers bring prices down in line with the lower cost of imports.”

Kakuhaja-Matundu says it depends on many other factors such as the rate at which the American Fed increases its interest rates among other things.

“But generally I think the appreciation points to a renewed investor confidence in RSA. That will be good for Sacu as it could translate in higher economic growth for RSA  - boost Sacu receipts which is good for GRN spending, which could lower our public debt, and also spur economic growth.  Should things go well for both RSA and Namibia one would expect a revision of the rating agencies ratings of both economies,” says the economist.

Political developments in South Africa coupled by agitation for the fall of Jacob Zuma, commitment to getting down to the root of state capture and pointers towards a likely Ramaphosa government may help sustain the Rand performance, analysts confide.

 Du Plessis is not entirely convinced, however, “The Rand is one of the most volatile currencies on the exchange market. Its value is not purely dependent on what happens in South Africa. Many times its rise or decline is due to broader emerging market sentiment."

Cirrus senior analyst Dylan van Wyk says, “Namibia’s exports are mainly made up of commodity exports, such as diamonds, minerals, fish and livestock. Although a large amount of this goes to South Africa, the exports which are sold abroad are negatively affected by a stronger domestic currency. As an example, most precious and base metals are priced in US dollar, for which we now get less Namibian currency.”

He says although import intensive industries will now have to pay less for items such as equipment, vehicles and petroleum products, which may make them more competitive, however, this process usually takes much longer.  

“The positive political developments have given the rand some strong momentum, which may continue in the short term. However, based on purchasing power parity calculations, I believe the rand is currently near its long term fair value,” he says.