South Africa’s Department of Trade and Industry (DTI) appears to be factoring in an exchange rate that will continue to trend weaker over the medium term as it prepares to scale up its industrial policy activities, in line with its National Industrial Policy Framework (NIPF).

“The general weakening of the currency that is expected to take place over the medium term provides a window of opportunity for South African exporters,” the department outlined in its 2007/8 annual report, released on Thursday.

It added, therefore, that despite the global economic slowdown, the “South African economy remains robust, and the upside potential, considerable”.

The department’s statement comes at a time when the rand has already weakened materially against currencies such as the US dollar and the euro.

In fact, the rand, which was as strong as R6,75 against the US dollar in mid-January, was trading closer to R10 against the greenback on Friday. A similar weakening trend has occurred against the euro, with the rand trading at close to R13 to the euro on Friday.

The factoring in of a weaker currency was also in line with a recent report by the so-called Harvard Group, which suggested that the South African Reserve Bank (SARB) be “responsive to deviations of the real exchange rate”.

In other words, it suggested intervention in the currency market to prevent excessive appreciation, as well as through signalling its concern about the level of the exchange rate.

This stance was heavily criticised by SARB governor Tito Mboweni, who argued that any effort to target a level for the currency was unworkable.

But the recent African National Congress Alliance summit, which came out strongly in favour of a more active and interventionist industrial policy, also appeared to come out in favour of a weaker rand.

In fact, it was suggested that a task group be set up to assess the effectiveness of South Africa’s macroeconomic policies in general, and include a specific evaluation of possible measures to ensure a relatively “competitive” currency.

Subsequently, though, South Africa’s Finance Minister Trevor Manuel had argued that a flexible exchange rate – along with a well-capitalised and prudently regulated banking system, low external debt, deep domestic capital markets, higher foreign exchange reserves, flexible inflation targeting and a sustainable fiscal policy – was a key anchor to future and improved economic performance.

But in his medium-term budget policy statement he acknowledged that there “remain aspects of microeconomic policy where more has to be done”, noting specifically trade and industrial policy.

He also set aside R5,6-billion over five years for tax incentives designed to support government’s industrial-policy projects. The incentive would consist of two elements: an additional deduction for real fixed investment; and another for training. The maximum additional deduction for real fixed investment would be R900-million for each project, while the training element had been capped at R30-million a project.

In addition to this tax relief, he unveiled a series of other incentives were being developed to support the implementation of the NIPF.

Trade and Industry Minister Mandisi Mpahlwa had indicated previously that a new incentive architecture would evolve, with the tax incentive being but one component of a larger package for which some R10-billion would be made available over the next three years.

PUBLICATION: Engineering News
AUTHOR: Terence Creamer
DATED: 7th November 2008