MANUFACTURING in South Africa looks to be in dire straits. Last week’s Manufacturing Circle survey says a more competitive exchange rate in South Africa has supported a number of firms. But rapid, bunched-up increases in administered prices remain a "significant challenge".
Manufacturers and unions are united in believing a weaker rand will boost exports, and lead to more investment and jobs. However, a weak currency fuels inflation, and a steady rise in the cost of imports, especially capital goods.
Investec says strike action in South Africa is afflicting the rand, which has tumbled to a four-year low against the dollar. But cutting interest rates will not stimulate low growth, as South Africa suffers structural rigidities, including administered pricing that far outstrips inflation, and inflexible labour legislation. This has affected South Africa’s investment ratings. The bank says the country is likely to see more of the same, especially as strikers are rewarded with more pay without simultaneous rises in productivity.
Meanwhile, the Department of Mineral Resources threatens miners with the loss of licences in the face of proposed retrenchments.
Along with extremely low consumer confidence, weak business confidence, rising unemployment, South Africa also lags emerging market peers in economic growth rates. But Investec notes South African wages remain on an upward trajectory in real terms.
However, it says this is not surprising, given the rise in electricity, water and fuel costs and a high consumer debt burden.
According to a new World Economic Forum (WEF) manufacturing report released with Deloitte, executives around the world want government policies that simplify taxes and protect free and fair trade.
They also want stronger energy and infrastructure policies, and more focused education and labour frameworks promoting advanced manufacturing. By all counts, South Africa scores badly, despite the endless legislation and talk.
Deloitte says the WEF report is both timely and relevant to South Africa. Business Unity South Africa special policy adviser, Raymond Parsons, told the Steel and Engineering Industries Federation of South Africa last week that the National Development Plan (NDP) might be the country’s "last opportunity for a long time" to avoid poor economic growth.
But successful implementation requires a high degree of collaboration between business and the state. The challenges of unemployment, poverty and inequality will not be adequately addressed at growth rates of 2% to 3%.
"In the spirit of the NDP, the government has already indicated its desire to work more closely with the private sector, such as in infrastructural development ... and it is now necessary for business to gear itself accordingly," he says.
However, at the same time Trade and Industry Minister Rob Davies tells the National Council of Provinces budget vote debate in Parliament that within the New Growth Path, the Industrial Policy Action Plan (Ipap) is a centrepiece. All this points to the "policy confusion" prevalent in South Africa.
Like Investec, the minister talks of "structural" imbalances in the economy. But unlike the private sector, he says that the ruling party’s national conference in Polokwane tabled the New Growth Path and Ipap as the drivers of creating jobs in manufacturing.
Investec Group Economics head Annabel Bishop says the high level of state control in South Africa and loss of free market functioning means the South African labour market will become increasingly fractured.
But there has been substantial government resistance to proposed retrenchments to rationalise the workforce in the face of rising costs, given low mechanisation and high levels of labour intensity in South Africa compared with international models.
In his budget vote speech last week, Mr Davies said the term of the Zuma administration coincided with the most severe global economic crisis since the 1930s.
Since 2009, South Africa’s economy lost close to 1-million jobs. About 20% of these were in manufacturing, which contributes to 14% of gross domestic product, well down from about 22% a few decades ago.
The latest Manufacturing Circle survey cites supply constraints in the quarter as including steel shortages, power outages, and scarce water resources. Also, a shortage of high-grade coal, poor harbours and railways, and inadequate foundry capacity. An influx of cheap imports is also harming industry.
But positive factors for the manufacturing outlook include the weak rand, implementation of the state’s infrastructure programme and export opportunities into Africa, according to the survey.
However, the WEF report says public policy that boosts industry is characterised by consistency, stability and certainty. It is globally competitive, fair and enforced. It is also developed through dialogue and collaboration.
For now, though, much of this seems beyond South Africa’s reach.