Falling rand raises concerns

A statistic of more than passing interest to the mining industry is that in 2000, 80% of emerging markets had net outflows of equity capital; by comparison, in 1996, when all seemed rosy, 90% of them had net inflows. The tap that, in the mid-1990s, sustained investment (and with it the consumption of commodities) turned down sharply.

As we observed on this page last week, emerging markets matter a great deal to the mining industry and to other commodity producers. Industrialization is what creates demand for metals, and recessions in the Pacific Rim and, more recently, in Latin America have had a telling effect on the health of our industry.

This brings us to another emerging economy, South Africa. (Parenthetically, we would note that a century ago, a European seeking his fortune might as easily have chosen Argentina, Brazil or South Africa as Canada, Australia or the United States, and with equally good reason.)

South Africa is facing serious macroeconomic difficulty. Over the past year the rand has fallen 37% in U.S.-dollar terms, from US13.2 to US8.3. In the past month, the fall has been the steepest of all, a 14% drop from US9.7 at the end of November. Some of the blame for the recent fall has been placed on the fears that attend on the Argentine currency crisis, but a more generalized fear — that the South African economy and public finances are threatened by external factors like foreign debt, and that those threats are not going to be well managed — may be working on the rand.

So far, that fear seems to be unfounded. External debt has been kept to 47% of the country’s US$369-billion gross domestic product, and the government is running only a modest budget deficit. Even with the falling rand, inflation is at 7.8%, just outside the South African Reserve Bank’s target range, and the trade balance is healthy. The economy has strong fundamentals.

But equally, South Africa is both an emerging economy and a commodity producer itself, and recent years have been rough in both respects. Another factor is the government’s fascination with race, and its enduring belief in socialism as a remedy for both injustice and poverty. South African employment laws are a recipe for creating inefficiencies; employers avoid taking on new hires, for fear of not being able to dismiss under-performing employees, and business expansions are stifled.

That President Thabo Mbeki and his African National Congress government are not committed to growth through capitalism is hard to deny. The South African economy is heavily regulated, largely in the name of redressing the injustices that grew out of decades of domination by the white minority. Unfortunately a wave of the legislative wand does not injustice unmake; without prosperity, there is nothing to redistribute, as Zimbabweans are finding out to their considerable cost.

A small advantage comes from South Africa’s resource industry, which may catch a double wave of increasing dollar-denominated commodity prices and decreasing rand-denominated costs. Average cash production costs across the South African gold industry are now below US$200 per oz., and it seems reasonable to think that other mineral producers are also riding the same tide. If commodity prices turn this year, increasing foreign currency inflows could be an important brace for the country’s wider economy, one that would give the Reserve Bank a second weapon, beside interest-rate increases, to support the rand.

President Mbeki’s government will have to govern well to prevent a currency crisis if events go badly, or to take full advantage of a recovery if they go well. That means being ready to attack inflation, should it come, and defend against declines in the rand by increasing interest rates if that becomes necessary; it means being willing to loosen the regulatory straitjacket that binds much of South African industry; and it means being able to move beyond the ANC’s fixation on ideologically driven programs that reflect an old confrontation that was won by the forces of good a long time ago.