The Bureau for Economic Research (BER) designed a few special questions that were included in its regular manufacturing survey in order to shed more light on this issue. The survey was conducted between 25 October and 22 November amongst 1100 manufacturers countrywide across all the major manufacturing groups. The BER’s manufacturing survey has a proven 30-year track record of reliably gauging actual manufacturing business conditions.

Of the respondents, 62% reported that they have been active in exports over the past two years. The results reveal a disturbing picture, certainly as far as SA’s manufacturing export capacity is concerned:

• Only a handful of the exporters, i.e. 14%, managed to "continue growing export volumes" over the past two years;

• 16% indicated that they managed to maintain export markets, if not grow them;

• 28% responded that they "suffered a decline in export volumes"; and most worryingly

• no less than 39% indicated that they have "closed down export capacity permanently".

These results confirm that SA’s manufacturing exporters are in deep trouble at the exchange rate of below R6/$ and R7.80/euro. It should be borne in mind that the global economy has been in a synchronised growth phase over the past 18 months, with growth being exceptionally strong during the second half of 2003 and the early part of 2004.

Nonetheless, only 14% of the manufacturing exporters responding to the survey managed to continue growing their exports, 28% suffered a real decline and close to 40% have decided to close down export capacity.

It is evident that in some sectors production for export is being switched to the lively domestic market – 25% of the respondents indicated that this has been their company’s response over the past two years. The chart below left reflects the diverging trend between manufacturing domestic sales and export sales. Compared to four out of ten respondents reporting positive year-on-year growth in domestic sales volumes, no less than three out of ten report year-on-year declines in export volumes. The SARB’s 2004 Annual Report quotes a 13% year-on-year decline in manufacturing exports during the first half of 2004; this is consistent with the BER’s manufacturing survey results.

In asking the question, "at what level of the exchange rate does your company become competitive in world markets" (given existing production conditions), the average answer is R7.70/$. This should be interpreted as a reliable indication from the factory gate of "fair value" for the rand. At below R6/$, manufacturing exporters are bleeding and under serious pressure from import competition. Whilst the recovery in manufacturing domestic sales attests to the fact that some sectors have made headway against import competition and/or are less troubled by it, the BER survey results show a wide gap between manufacturers’ domestic sales performances and the booming consumer market. Only 67% of manufacturers report satisfactory business conditions compared to 90%-plus in the retail, wholesale, motor trade and construction sectors. The chart above right shows how imports have been gaining on exports in the manufacturing sector over the past two years.

Manufacturers are also relatively pessimistic regarding general export prospects.

More than half of the respondents regard general 12-month export prospects as "Very bad" (11%) or "Not good" (44%). This bearish outlook could mainly be as due to expectations regarding the currency, as the global economic outlook is generally favourable (albeit not without risks). Only 14% of the respondents reported "Good" (12%) or "Very good" (2%) export prospects over the next 12 months. The remaining third of the respondents regard 12- month export prospects as being "Average". The chart below indicates the extent to which manufacturing export optimism has been replaced by pessimism over the past two years.

The first point to make is that these results reflect hard economic realities; it is not a case of industrialists whinging about a bygone era of persistent exchange rate depreciation. In order to state that one is competitive in export markets at an exchange rate last witnessed four years ago while general inflation escalated by 22% over this period (i.e. 15% more than one’s trading partners), implies strenuous productivity adjustments.

It is rather a case of an uncompetitive currency (or, overvalued currency) that is driving manufacturers to close down export capacity and focus on the more lucrative domestic market (should that choice be available). Considering the fact that the manufacturing sector contributed more than 50% of export revenues in 2003, the implied loss of export capacity suggests a great economic cost tied to the strength of the currency.

A high rate of growth in domestic expenditure (by consumers, government and business) and imports will simply become unsustainable. Put differently, the otherwise most encouraging economic upswing currently underway could come to naught once the exchange rate, inflation and interest rates react more viciously due to an unsustainable balance of payments. The balance of payments vulnerabilities are already evident. The problem is that even in the likely event of the rand exchange rate depreciating in future, it is not altogether clear that closed export capacity will be revived as easily; this tends to be a more arduous process.

It is important to understand that the current economic upswing is not a result of the strong currency as some commentators would like us to believe; the economic revival has its roots in firmer foundations in the making over the past five years at least. The problem is that the strong rand is currently indirectly (and unnecessarily) fuelling domestic spending, whilst at the same time constraining the growth in local production, rendering growth less well balanced and in the end unsustainable.

Policy makers should do everything in their power to "lean against the wind", i.e. to counter volatility in the market. At the present point in time this implies that public comments regarding the rand should be aimed at softening the currency rather than indirectly supporting the appreciating tendency. Furthermore, the SARB should accumulate reserves more aggressively as the monetary cost of sterilisation pales into insignificance against the economic cost of lost export capacity and jobs. The Bank should also consider easing interest rates (as it did in August) to close the gap with interest rate levels abroad, currently inviting hot money inflows on the capital account of the balance of payments. Finally, official intervention may be necessary to stem the tide of cheap imports flooding some sectors.

Industry has to adjust to these realities and there may be more scope to do so.

However, what the BER special manufacturing survey reveals, is that leaving the rand to its own devices in an environment of a haemorrhaging US dollar and super-low interest rates abroad risks permanently losing manufacturing export capacity.