South Africa’s manufacturing output has risen to its highest point since October 2016, according to new data released December 2018. Manufacturing output rose faster than anticipated in October 2018, which has helped to lift the South African rand amid further signs of economic recovery from the nation’s recent recession.
Contractions in the first two quarters of 2018 saw Afrika’s largest industrialised economy fall quietly into recession, but the rise of manufacturing, as well as retail and agriculture, has helped breathe new life and confidence in South African businesses.
The latest data found that manufacturing output grew by 3% year-on-year in October, underpinned by greater production of metals and automobiles. Output of automobiles, vehicle parts and accessories soared by 14% year-on-year, while the output of food and beverages throughout South Africa was up 6% year-on-year, along with iron and steel production (3.2% year-on-year).
Good news for mining in South Africa
Even South Africa’s mining industry, which has been acknowledged worldwide for its decelerating production, stabilised somewhat in October with a 0.5% year-on-year growth in output. Both manufacturing and mining remain hugely influential drivers of the South African economy, with manufacturing accounting for 14% of overall gross domestic product (GDP), followed by mining (8%).
According to Elize Kruger of NKC African Economics, South Africa’s economy rebound in October was a “broad-based recovery” and wasn’t just “focused on one sector”. Kruger believes that the figures are the first sign that the economy is “beginning to turn around for the better” after a grim 2018 for many South Africans. Nevertheless, Kruger pointed to the various “headwinds” that could still pose a short-term threat to the South African economy, notably “higher fuel prices”.
Prior to the release of South Africa’s manufacturing and mining output data, the South African rand found itself up 0.28% against the US dollar at around 14.34 to the dollar. However, it strengthened further on the 11th December 2018, to 14.37. According to Reuters, uncertainty surrounding the UK’s Brexit deal with the European Union (EU) had affected risk appetite in the forex markets in the previous trading session. However, these better-than-anticipated figures from South Africa’s production output have encouraged forex traders to take the rand more seriously once again.
The forex trading industry in South Africa is still very immature, with the nation’s Financial Services Board (FSB) regulating all financial intermediaries that offer retail traders the chance to trade on the post-recessional rand.
What does 2019 look like for the rand?
A recent Bloomberg survey found that the rand has been one of the most heavily affected currencies by global economic growth and volatility within the markets. Bloomberg’s poll of over 160 bankers, chief executives, CFOs, corporate treasurers and forex and hedge fund execs at the Foreign Exchange Summit FX18 found that 37% believed these to be the most influential macro factors influencing the rand in 2018, followed by the flow of foreign investment into South Africa (31%). Only one-fifth (21%) of individuals surveyed said that the monetary policy or trade friction of the US was having an impact on the domestic economy.
On a local level, Bloomberg’s survey respondents pointed to South Africa’s political landscape as being one of the most influential factors on the rand in 2019. More than half (54%) said that the stability of the government would have a positive or negative effect on the rand against the US dollar. Meanwhile, 22% believed that the South African Reserve Bank’s interest rate policies would have a significant bearing on the future of the rand in 2019. Despite the fanfare surrounding South Africa’s sluggish mining industry, only 7% of those surveyed believe its success or failure would have a lasting impact on the rand next year. When asked about the potential trading range of the rand against the US dollar in 2019, almost 75% of respondents opted for a broad range of R12-R15 to the dollar. However, just 26% believed the rand/dollar trading pair would see the rand firmer than R12.
Daniel Mminele, deputy governor of the South African Reserve Bank (SARB), believes that there is likely to be a “change in investor sentiment towards emerging markets” given the “escalating trade conflicts” such as those between the United States of America and China. Mr Mminele also pointed to “geopolitical developments” such as Brexit that could yet be “key risks” to the rand going forward.
One of the potential sectors to encourage investment in South Africa and drive innovation across the country is the FinTech industry. We’ve already mentioned that several local FinTech firms are garnering attention and investment from venture capital funds.
Improving the connectivity of South African businesses and consumers should be a number-one priority as the continent’s industrial beacon. Smartphone penetration and reduced data rates are essential to creating a compelling FinTech market. The emergence of cryptocurrencies in South Africa could also see the nation’s FinTech industry steal a march and attempt to lead the way as Africa’s trailblazer of digital assets.
Cover image credit: A coal-fired power station in Mpumalanga. Wikimedia Commons
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