Pressure mounts against strong Rand

| Tuesday August 24, 2010 00:00

Gordhan added that a protracted public service strike would not have a big impact on Africa's largest economy, as more than 1 million civil servants took to the streets seeking higher wages, worrying investors and putting pressure on the government to reach a deal.

The rand last week hit a 2-1/2-year high of 7.1740 against the dollar last week, partly benefiting from increased inflows into the bond market, but it has since lost steam. By 1211 GMT, the currency was trading at 7.2650/dollar.

'There is still concern about the strength of the rand. What we call for is still a stable and competitive exchange rate'.

But Gordhan declined to comment on proposals by the ruling African National Congress for a tax on capital inflows to curb rand strength.

The ANC will discuss the proposals at a mid-term policy review conference next month, but a senior ANC official said earlier this month that the proposals will be subject to a long process of consultation.

A strong local currency is a negative for companies that rely on revenue from abroad, because it eats into the value of their overseas earnings.

Shipping firm Grindrod reported a 10 percent fall in first-half earnings on Thursday, hurt by the stronger rand.The currency has also weighed on the manufacturing sector, which is shedding thousands of jobs, pushing unemployment to 25 percent of the labour force.

Gordhan said in a speech at the presentation of results from the state-owned agricultural bank that the country's economy would need to grow by 7 percent annually over 20 years to create jobs and reduce poverty.

'We want a sustainable economy that will create jobs and reduce poverty. We need to grow by 7 percent over a 20-year period and previously we've only done 5 percent. It's a challenge,' he said.South Africa's economy grew 4.6 percent in the first quarter from the previous quarter, after exiting a recession in the third quarter of last year -- the first since 1992.

'Seven percent is a significant number, and we definitely will not get there in the next decade,' said Danelle van Dyk, an economist at Standard Bank. 'We need a significant reversal in the sluggishnesss of the global economy for us to propel to a 7 percent economy.'

Asked if the strike of more than 1 million public sector workers which entered a second day on Thursday would affect the economy, Gordhan told reporters: 'I don't think so'.

'I think this is part of normal democracy and we must expect employers and employees to have these contestations now and again, and my only appeal would be that we resolve it as quickly as possible,' he said.

Potentially adding to the scale of the strike, a spokesman for the National Union of Metal Workers of South Africa said autoworkers would begin striking in the fuel, tyre and car component sectors as early as next week.

Analysts expect a deal to be reached in the next few days at the earliest or by the start of September at the latest.

Gordhan said the risks for global growth had risen sharply and reiterated that South African growth is expected to be at least 3 percent in the second quarter.

'We have risks to (global) growth that have risen sharply and increased turbulence in financial markets. In South Africa we can talk about a moderate recovery ...a growth for the second quarter is expected to be at least 3 percent.'

The US Federal Reserve downgraded its economic outlook at its policy meeting this month, adding to worries that the US economic recovery might be slowing.

Van Dyk said growth will be weak next year, too.

'The larger concerns are not for this year, but for next year and that's a source of concern for government since their forecasts (3.2 percent in 2011) have been stronger, whereas analysts are revising growth lower for next year.

The National Treasury will release its revised growth forecasts on October. 27 when it unveils its Medium Term Budget Policy Statement (Reuters)