A WEAKER rand may be touted as the solution to SA’s flagging manufacturing sector, but unless underlying structural problems are addressed, it will only contribute to inflation. While a weaker rand provides temporary relief, it ultimately results in inflationary pressures, says Nico Vermeulen, director of the National Association of Automotive Manufacturers of South Africa.

"Any real benefit is negated as soon as the increase in imported content catches up," he says. "Inflation will come back to bite you ."

South Africa’s motor manufacturing industry is the biggest in Africa, but represents less than 1% of the global industry.

The rand has weakened 5.7% against the dollar so far this year and is the worst performing out of 25 emerging market currencies tracked by Bloomberg.

The consumer price index rose to an annual 5.7% last month from 5.6% in November. It is now firmly in the upper end of the Reserve Bank’s 3%-6% target range.

Mr Vermeulen says imported content comprises 30%-40% of automotive manufacturing inputs and manufacturers will have to price in these increased costs.

In order to match international competitors, Mr Vermeulen says South Africa needs to improve competitiveness in the supply chain. A weaker rand plays a part in this because it pushes up the price of fuel and increases transport costs.

Last week, Trade and Industry Minister Rob Davies said the rand’s slide should be welcomed as it would assist exporters and offset lower demand in Europe.

Econometrix chief economist Azar Jammine says the rand has been notable in being virtually the only emerging market currency to fall against all other major currencies. SA has gained a "potential advantage in terms of exports if we can maintain this lower level".

The New Growth Path also proposed a strategy for the Reserve Bank to reduce real interest rates to encourage the rand to fall and make exports more competitive.

"In many ways they have achieved this (rand weakness) through the likes of outspoken ministers such as Susan Shabangu," Mr Jammine says.

Ms Shabangu earlier this month took Anglo Platinum to task over plans to close some of its mining operations and cut 14,000 jobs.

Manufacturing Circle executive director Coenraad Bezuidenhout argues that if the rand trades at more competitive levels, it opens up the possibility of economies of scale. The Manufacturing Circle represents some of South Africa’s leading exporters, among them Bell Equipment and ArcelorMittal SA.

The local currency can weaken to levels closer to R9.50 to the dollar before there would be any adverse effects for manufacturers and the economy as a whole, Mr Bezuidenhout says.

Although difficult to estimate, there is still scope for the rand to weaken and economists have suggested as much as R9.25 /$ in the short run. In a risk-off environment, emerging market currencies would usually be the beneficiaries of increased foreign inflows. But Nedbank chief economist Dennis Dykes says the rand has been moving in the opposite direction. "Global capital has been pretty indiscriminate post 2008, but this is changing now."

South Africa has been affected by money flowing back into peripheral European currencies, rather than into the rand, Mr Dykes says.

The outflow, combined with social and labour unrest, a large current account deficit and rating downgrades underlie an increasingly negative sentiment towards the rand.

"The bigger risk (to the rand) is that we may be downgraded again," Mr Dykes says.

Since September last year South Africa has been subject to ratings downgrades by three of the world’s leading ratings agencies — Moody’s, Standard and Poor’s and Fitch.

Moody’s and S&P have kept South Africa on a negative outlook.

Although Mr Dykes says it is difficult to predict what will happen with South Africa’s sovereign credit rating, he warned there was a " chance of a rapid depreciation if we have a downgrade from key agencies".