The recent months in South Africa have witnessed the local unit fall to new lows and then regain some growth. How does this affect the average person or SMME’s and should we even care about what happens in these currency wars? We are significantly impacted by the South African Rand (ZAR). Raw materials are exported, which means that exporters enjoy superior profits during the period in which the Rand is weak. The flip side of this is that a higher quantity of finished goods are imported. During times of a weak Rand, consumers end up paying more for these imports. For small and medium business operators, this equates to violent swings in their inputs. A critical choice that SMME’s make on a daily basis is whether to reduce profit margins, because of the high input imported price, or alternatively, ‘hike up’ the price of the goods they sell. This is a delicate decision, because if they up the sale price they may price themselves out of the market. On the other hand, if they absorb the high input price and keep the sale price flat their profits are compromised. Often during these moments, SMME’s may have to lay off workers just to stay in business, thus resulting in the rise of unemployment.
The impact of the Rand weakness has a direct impact on increasing inflation. Rising prices equate to consumers buying fewer goods. This period may also be accompanied by rising fuel prices, a phenomenon that is currently happening in South Africa. High petrol prices translate into a second dose of inflation. The spin of higher inflationary prices are a catalyst for the South African Reserve Bank to spike interest rates. Concurrently, a water shortage is being experienced resulting in smaller agricultural yields and higher food prices. Amidst this ‘merry-go-round’ of a weak Rand, high petrol prices, high food prices, high unemployment and higher interest rates, it is the consumer who is severely affected. In addition, a reduction in consumer spending means that the SMME’s are immediately impacted.
How did we get into this ZAR Wars mess?
A significant blow to the Rand occurred in December with firstly, a downgrade from the rating agencies. Secondly and more fatal, was an assault on the national currency when President Jacob Zuma fired Finance Minister Nhlanhla Nene and replaced him with Minister David van Rooyen. The change of the head of Finance was not well received in the market place and the currency dipped to its lowest level in history, following the announcement. The Pravin Gordhan appointment days later, helped smooth the Rand momentarily, but the fear of further downgrades still hurts the currency.
The chart below depicts the Rand value against the US Dollar at three month intervals.
3 Month Rand Chart
Sourced : Moneyweb
The chart below depicts the slide of the Rand as news of a vote of no impeachment of President Jacob Zuma filtered through the currency market.
5th April – The day parliament voted to impeach the President
Source : Moneyweb
What then is the solution to these economic woes? Intense austerity should be exercised and savings should be made when possible. For example, bargain hunt for all your purchases, car pool if possible and use as little electricity and water as possible. Even when the situation improves, it will be prudent to remain conservative with spending as that may provide the opportunity to save surplus funds to survive future economic down-turns.