Weaker rand poses threat to 'buy local' say economists

Rob Davies is pushing the benefits for the Buy Local campaign on job creation. Image: GCIS

Trade and Industry Minister Rob Davies has indicated that the positive effects and success of the Buy Local campaign‚ now in its third year‚ are dependent on the private sector and consumers throwing their weight behind the initiative.

But economists warn that while noble‚ the campaign is "fraught with challenges"‚ as the weakened rand could trigger price increases and curb consumer spending.

Local procurement has been recognised as a key driver for economic growth. As part of the government's commitments to the Local Procurement Accord‚ signed in October 2011‚ the plan is to source 75% of products and services locally. A new drive is also under way to launch a loyalty programme via banks and retailers to incentivise local procurement.

While there is unanimous agreement over the benefits that the local procurement of products could bring‚ such as job creation and a strengthening in industrial and manufacturing sectors‚ the weakened currency will make it extremely difficult for local players to compete with ready-made foreign imports‚ according to Meganomics chief economist Colen Garrow.

Rand waning

"Labour costs and disruptions and other input costs mean local manufacturers will really feel the pinch. Buying local may not be price-efficient‚" he said.

The rand has hit its lowest level in five years against the US dollar this year‚ losing about 25% of its value over the past 12 months.

Manufacturing Circle's managing director Coenraad Bezuidenhout said that a survey it had conducted showed that 80% of South African manufacturers procured only 40% of their product inputs in SA. He also said interruptions of water and electricity supply needed to be dealt with.

Manufacturing Circle's Coenraad Bezuidenhout says local manufacturers get only 40% of their inputs locally. Image Manufacturing Circle

Despite these conditions‚ Davies said that it was "incumbent upon the business sector and consumers" to commit themselves to the cause.

"We cannot expect to grow‚ develop and increase employment as a country if we simply continue to be located in a world economy as producers and exporters of primary products and importers of finished goods‚" he said.

There are indications that the manufacturing sector has already been hard-hit by the rand's performance. According to the Adcorp employment index‚ SA lost 36‚290 jobs in January alone‚ with the most significant job losses in manufacturing and construction.

Cheap imports

Local producers in the textiles and poultry sectors have complained about the influx of cheap imports that have crippled manufacturing capacity and led to job cuts.

"How much longer the rand will continue to battle‚ no-one knows‚ although it would be premature to dismiss it. We can (certainly) anticipate a recovery in the long-term‚" said Garrow.

Although the weakening of the rand has been largely attributed to the unenthusiastic outlook global markets have adopted with regard to emerging markets‚ certain destructive local and international factors have played a role‚ according to Johann Els‚ senior economist at Old Mutual Investment Group.

International influences

The Buy Local programme could face some real problems. Image: eddy182182 Deviant Art

"In the short term‚ there are many negatives for the rand both nationally and internationally. Just here at home‚ factors affecting the currency include the large current account and budget deficits‚ lack of economic growth‚ unemployment‚ policy issues as well as the uncertainty that comes with an election year‚" Els said.

He said international factors included the decision by the US Federal Reserve Bank to taper its bond-buying programme by another US$10bn‚ to US$65bn a month‚ beginning in February.

"In the medium term we should see some stability in the currency because of stronger and more synchronised developed economy growth. This‚ combined with a more competitive currency‚ should benefit exports. And combined with more expensive imports‚ should limit imports. The combined effect should mean an improving position on the current account balance‚" Els said.

SA's current account deficit is -6.5% of gross domestic product (GDP). It reflects a combination of factors‚ including a sizeable increase in imports‚ and some deterioration in net dividend outflows

The Treasury's forecasts for GDP will be closely monitored in the budget speech on 26 February‚ as negative sentiment over strikes has hit the level of foreign investment.