A powerful, albeit beleaguered, section of South African business has teamed up with three of the countries largest trade unions in a bid to force government to intervene to weaken the buoyant South Africa currency, which rose 30% against US dollar in 2009 and has held on to many of those gains this year.

The strength of the rand, which together with Brazil's real and Australia's dollar was among the world's top performing currencies last year, is perceived as a barrier to industrial development and job creation in the manufacturing sector.

Nine leading South African manufacturing enterprises, including JSE-listed companies ArcelorMittal South Africa, Altron, Bell and Hulamin, together comprising the so-called ‘Manufacturing Circle', have already signed a declaration calling for action to deal with South Africa's "overvalued and volatile currency" and more signatories are being sought.

The Congress of South African Trade unions (Cosatu), Federation of Unions of South Africa and the National Council of Trade Unions have also signed the ‘Statement of Declaration by Manufacturers and Trade Unions on industrial and economic policy interventions needed to create decent jobs'. Also a signatory to the document, which was unveiled at a joint media briefing in Johannesburg on Monday, is the National Association of Automotive Component and Allied Manufacturers.

The PG Group's Stewart Jennings said that competitive exchange rates had formed the foundation of all successful industrialisation efforts the world over. He added that there was, thus, a need to deal with both the volatility and the level of the South African unit, arguing that R9 to the US dollar would go a long way to help in reviving the embattled domestic sector.

Cosatu general-secretary Zwelinzima Vavi said that a level of between R9/$1 and R10,50/$1 would create the platform for reindustrialisation and would also help arrest the current trend of job letting in the manufacturing environment. In 2009, the South African economy shed nearly a million jobs across all sectors, and additional job losses were reported in the first quarter of 2010, raising the overall official unemployment rate to above 25%.

The contribution of manufacturing to the South African economy has also fallen from around 22% of gross domestic product in the early 1990s to around 16% currently, and Vavi said it would be a "disaster" if the sector were allowed to decline to a single-digit-type contribution.

Jennings called for the creation of a "think tank" to debate the mechanisms for reducing, or even pegging, the currency at more competitive levels, arguing that this could be established against a "basket" of currencies, including the dollar and the euro.

The labour movement has, for many years, called for greater monetary policy alignment with the industrialisation needs of the country and reiterated that call on Monday, this time with the added momentum of the business lobby group.

The call also comes at a time when there appears to be a greater willingness within government to engage on the issue, with Trade and Industry Minister Dr Rob Davies having told Reuters at the weekend that government is looking at mechanisms to make its currency less volatile and more competitive. "We have agreed in government that what we need is a less volatile and more competitive exchange rate," Trade and Industry Minister Rob Davies said.

DOWNSIDE RISKS

However, those closest to the country's exchange-rate policy setting processes are naturally concerned about the unintended consequences of aggressive intervention, with the South African Reserve Bank (SARB) also cautioning that any intervention to weaken the currency would probably lead to higher inflation.

Absa Capital economist Jeff Gable told Engineering News Online on that, while he had sympathy for those calling for less volatility, he felt that it would be unwise for the authorities to make any attempt at trying to set a level for the rand.

Given South Africa's lack of savings, the country was reliant on foreign inflows to cover investment shortfalls, including investments into critical infrastructure.

A second problem, in Gable's view, was that any exchange rate weakening had, historically, led to significant increases in inflation, which meant that the gains were generally "short-lived".

A third concern was that, there were, in practice, only a handful of countries that had been successful in managing their currencies and that success had generally been built on the back of material current account surpluses, which made these countries less reliant on foreign inflows.

However, Gable said he would be supportive of interventions by the SARB that could help dampen wild currency swings, so as to create greater planning certainty for businesses.

OTHER ASPIRATIONS

But the declaration was not confined the currency matter and also called for: a reduction in real interests rates; the scaling up of concessional financing mechanisms; broadening support for buy local campaigns; the development of a preferential procurement framework that promoted the creation of industry, particularly around government R800-billion infrastructure investment programmes; and for appropriate incentives and trade policy remedies to support the implementation of the second industrial policy action plan (Ipap2).

Jennings indicated that there appeared to be a greater willingness within government, and from within the SARB to discuss interventions to weaken the rand, noting that the Manufacturing Circle had already met with several economic Ministers and the SARB on the issue.

But he was also highly critical of the National Treasury, who he said had not responded to several requests for a meeting, as well as of a perceived lack of alignment between the country's industrial and macroeconomic policies.

The Manufacturing Circle and the labour unions came out in strong support of the Department of Trade and Industy's Ipap2, which placed the revival and expansion of manufacturing at the heart of the country's emerging new growth path.

However, the signatories also called on government to ensure that there were adequate resources to fund the Ipap2, as well as for "consistent messages" in the support of industrial policy "from all quarters of government".

Again alluding to the perceived lack of support from within the National Treasury, the declaration adds: "Cabinet needs to ensure that there is unqualified support for the Ipap from all departments, if we are to succeed in addressing the deficiencies in the existing industrialisation and economic development trajectory".

The National Treasury rejected the allegations made by the Manufacturing Circle. It told Engineering News Online that its deputy director-general responsible for Public Finance had held engagements with the body's chairperson "during the latter part of 2009 and earlier this year".

"Engagements stopped for reasons we do not understand as National Treasury. We are, however, open to continuing with engagements," a spokesperson said.

The National Treasury also stressed that it participated in the economic cluster with all the departments in the cluster and that policy alignment was discussed on an ongoing basis.