Can the rand rescue the SA economy?

Despite screaming headlines about the falling rand and the fate of the South African economy, the weakening currency acts as a pressure valve for some of the country's struggling industries.

The currency, which has taken a nose dive since two different finance ministers were appointed in the space of a week towards the end of last year, has boosted the prospects of long-struggling gold mines and provided a safety net for companies such as petrochemicals giant Sasol, bleeding from the plunge in international oil prices.

Oil, at around $30 a barrel, is trading at levels last seen more than a decade ago.

"South Africa should seize the opportunity provided by the current weaker rand," said Finance Minister Pravin Gordhan after a special cabinet meeting this week.

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The rand is one of the most traded currencies in the world, and it plunged to a record low of almost R18 to the dollar this week, before recovering.

As a bellwether for emerging market sentiment, the rand has been sold off as international investors exited the segment because of sluggish growth prospects following weakening Chinese growth. This is exacerbated by political uncertainty in South Africa triggered by the recent game of musical chairs at the National Treasury.

About 56% of the turnover of companies on the JSE comes from outside South Africa.

Pan-African Capital founder Iraj Abedian said: "The collapsing rand helps the struggling mining companies, and a company such as Sasol, to survive in the face of the down phase in the commodity price cycle. The weakening rand is both a partial safety net for corporate South Africa and ... a reflection of a struggling South African economy."

Luxury goods company Richemont saw its share price rise with the weakening of the rand. At the start of 2011, the rand was trading at around R7/$ and the company's share price stood at R37. Since then the price has shot up almost threefold to R105, almost in line with the rand's depreciation.

Mike Schussler, of Economists.co.za, said certain companies would continue to see their share prices rise as foreign earnings drove growth.

"A weaker rand will boost such revenues and give South African companies an opportunity to expand outside the country's borders at a faster rate."

In the main, the weakness of the rand helps offset the struggles of mining companies, which face falling commodity prices. This is especially the case for gold mines.

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Harmony Gold Investor Relations Head Marian van der Walt said the company's margins in rand terms had increased as much as 21% since September last year.

"Our gold is sold in dollars per ounce and then converted to rand-based revenue."

To illustrate the weakening of the rand, Van der Walt said that using the company's September quarterly results, the gold price that applied at the time was R473 567/kg (using an exchange rate of R13/$ and a dollar gold price of $1 133/oz).

"If applied today, the rand per kilogram price of, say, R572 000/kg to the September results, our margin would have been 21% higher."

With a possible interest rate hike on the cards, inflationary pressures could eat into the fatter margins, but Van der Walt said inflationary increases had been built into the company's plans.

"We will simply continue to control what we can - positioning each operation to be profitable by driving production and limiting cost increases."

In less than two months, Harmony Gold, which produces about 95% of its gold in South Africa, saw its share price increase almost threefold, from R8.81 at the start of December to R25 a share now.

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AngloGold Ashanti spokesman Stewart Bailey said the weaker rand provided some short-term margin for its gold operations. He said the company's focus remained on managing costs in the currency.

Rezco Asset Management investment director Rob Spanjaard said the higher rand gold price boded well for gold companies but was not a game-changer. He warned that gold companies should be wary of costs catching up with them.

The weaker rand also has the benefit of protecting certain industry sectors against imports and could see South Africans use more local products. It makes South Africa's exports more competitive and could shrink the trade deficit.

South African companies that import most of their products will have the worst time of it. Among them are some retailers, construction companies, heavy equipment importers, pharmaceutical companies and banks.

Vodacom corporate affairs head Maya Makanjee said the company had been hit by the volatility of the rand because it procured network and IT equipment and handsets from foreign sources.

Makanjee said the depreciating rand also made it harder for Vodacom to bring down the cost of 3G and 4G devices and make the internet more affordable.

However, she said the company had spent substantial capital in rolling out its mobile network, with close to R10-billion invested in the past year alone. Its share price has fallen about 5% since the start of the year, but overall is up 12% from a year ago, from R127 a share to R146. Its competitor, MTN, is down almost 40%.

MTN, which generates much of its revenue outside South Africa, has a multibillion-dollar fine hanging over it.

The company would not comment on how the weaker rand was affecting the business, but the longer rand weakness continues, the more the rand cost of the mobile operator's $3.9-billion (about R65-billion) Nigerian fine will increase.

Then there is the case of clothing retailer The Foschini Group, whose trading division makes 50% of its clothing in South Africa. The remainder came from "imported goods from the Far East ... China and increasingly Mauritius", said group chief financial officer Anthony Thunström.

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He said the company's offshore investments had cushioned the impact of the weakening rand, as the acquisition of UK-based retailer Phase Eight was to "ensure that we had a rand hedge in our overall portfolio and the devaluation of the rand now is certainly starting to come through our earnings quite nicely".

Adcock Ingram, a drugmaker largely focused on the domestic market, was concerned about the weakening rand.

"Adcock Ingram's key concern relates to our ability to continue to supply our full range of medicines on a sustainable basis, due to dramatically increasing cost pressure emanating from the sharp depreciation in the rand," said spokeswoman Vicki St Quintin.

Construction companies are hit by a double-whammy as the government and the private sector might commission fewer projects because of the weaker currency and consequent lower government revenue.

Murray & Roberts group investor executive Ed Jardim said: "The weakening rand will negatively affect investment decisions in South Africa, which will not bode well for the industry when it comes to new major infrastructure projects."

prinslool@sundaytimes.co.za, tshandup@sundaytimes.co.za, mahlangua@sundaytimes.co.za