Strong rand hurts manufacturing sector

South Africa's manufacturing sector has been shedding jobs as the strong rand and drastic cuts in import tariffs erode competitiveness. The issue has emerged as a major cause of concern as the country prepares for its presidential and legislative elections this month.

The clothing and textile sector best highlights the problem: it has been haemorrhaging jobs in recent years after riding the wave of a weak rand against the US dollar, which made South African products extremely attractive to foreign buyers.

Job security in the clothing and textile sector, in particular, came under the spotlight during the election campaign, when shop stewards of the SA Clothing and Textile Workers Union (SACTWU) called on political parties to address workers' concerns.

20,000 CLOTHING/TEXTILE JOBS LOST IN 2003

SACTWU Secretary-General Ibrahim Patel told IRIN that the strong rand, fuelled by US dollar weakness and high South African interest rates, coupled with sharp decreases in trade tariffs had hurt the sector.

"Last year we recorded 20,000 job losses," Patel said. "There was a significant increase in imports, largely from China, as well as a fairly noticeable decline in exports - both facilitated by the strengthening of the rand."

South Africa and Mauritius are the only countries in the region with established textile industries, but the cost of labour is relatively expensive and productivity is lower than in some competitor nations, such as China.

Patel said the union had held "constructive" dialogue with government.

"We are advising the Department of Trade and Industry (DTI) and the minister that at stake here is the future of the clothing and textiles manufacturing sector, which provides direct employment for more than 200,000 people (and indirect employment to around 500,000 people in total, including cotton farmers etc,). In an economy with potentially 8 million unemployed people, we don't have the luxury of bringing another 500,000 people into the ranks of the unemployed," Patel warned.

The labour union believes the root causes of the large-scale job losses was due to the South African government's rush to liberalise markets by cutting import tariffs in the mid- to late 1990s.

During the 1980s the clothing and textile industry benefited from protectionist tariffs levied on imported goods. However, this changed when South Africa signed the General Agreement on Trade and Tariffs (GATT).

The government agreed that clothing and textile tariffs would be reduced, but the union contends that they were cut more quickly and aggressively than the World Trade Organisation (WTO) had expected. "The industry was not able to cope with that, and what followed was enormous job losses," a trade union member told IRIN.

In the early 2000s things "calmed a bit" as the rand weakened against major currencies and "the government pushed the industry to export, [because the rand] made them more competitive and the industry could earn foreign currency".

Analysts said this strategy proved successful in 2001/02. However, from late 2002 the rand began to improve from an all-time low of R13,85 to US $1, and in 2003 climbed back to levels not seen in five years.

[At the time of writing it was trading at around R6.40 to US $1]

The sudden strengthening of the currency caught many by surprise - South African Airways lost billions on rand hedging, mining companies reported erosion of their earnings, and the clothing and textile sector found overseas orders drying up.

South African exporters, particularly in the clothing and textile sector, were not as competitively priced on international markets as two years ago, analysts said. In 2003 clothing and textile exports fell by 13 percent.

Conversely, local retailers found they were able to purchase offshore at much cheaper rates, resulting in a dramatic increase in clothing imports during 2003, up by 73 percent compared with 2002.

"The rand is inappropriately valued - we have priced ourselves out of the international market, not because of the fundamental strength of the economy, but because we have dollar weakness," Patel remarked.

Interest rates also affected the manufacturing sector, with South Africa's prime rate [at which banks lend money to favoured clients] reaching 11 percent.

"Interest rates are high, which means the cost of capital is still higher than competitor nations - in the US you have 1 percent interest on raising capital. Another dynamic is that our relatively high interest rates, compared to the EU [European Union] and US, have meant an inflow of 'hot' money into the country - instead of foreign direct investment, money is going into portfolios [to take advantage of comparatively high money market returns of 7 to 8 percent]. The effect has been to artificially prop up the rand," Patel said.

This has made it more expensive, relative to competitor countries, to modernise and pay the cost of working capital.

While these factors are all beyond the sector's control, some argue that over-reliance on export orders was a risky business proposition to begin with.

Tembeka Mlauli of the Department of Trade and Industry (DTI), told IRIN that government was looking at "where we went wrong".

"We have realised that because the industry was new in the export market, they did not hedge exports. While they had very good export volumes, to the US especially, they forgot ... the relationship they had with local retailers; they should have continued to supply local retailers," she said.

"They should have continued that relationship - you don't just cut that relationship because, as much as you need the export market, you still need local industry. Most of these companies started exporting 100 percent. When they wanted to come back to local retailers, the retailers said 'no, the relationship was destroyed, because you wanted only to export when the dollar was strong'," Mlauli added.

Commenting on the impact of currency fluctuations on the sector, she noted that "there is nothing we can do, the currency market is volatile."

STEMMING LOSSES

Both labour and government say they have initiatives underway, aimed at stemming losses in the clothing and textile sector.

In August last year SACTWU filed a notice with the National Economic Development and Labour Council (Nedlac), a statutory body under Section 77 of the Labour Relations Act, which allows workers to lodge protests on socioeconomic issues.

SACTWU cited retailers in the notice, as they wanted them to sign an agreement to source more stock locally. The union argued that if retailers continued to source from outside the country, they would contribute to the decline of the local industry, and shoot themselves in the foot if the volatile rand weakened and imports became too expensive.

As a result of negotiations in the Nedlac forum, most of the largest retailers in the country signed an agreement to source more products locally.

The notice also cited financial sector institutions financing or investing in retailers, and SACTWU got them to sign an agreement that they would use financing to increase local sourcing.

The union found it had a significant bargaining tool. Many financial institutions manage workers funds (pensions, etc) and have used these to invest in retailers who might be ignoring local producers in favour of imports.

Multilateral and bilateral meetings between stakeholders on how these agreements are being implemented continue. According to SACTWU's Patel, the benefits of the agreement with retailers should soon be felt.

"Because of the lag between procurement decisions and production in the factory, we ought to see results ... in the summer range that hits stores from October onwards. Those orders are starting to be placed now," Patel said.

However, the agreements are short-term and negotiations are underway to extend these beyond the initial six-month phase.

The DTI has said it is hoping that by marketing local fashion designers and linking them with local suppliers, they might be able to exploit opportunities abroad.

"We are part of the global arena, [but] there are things we can't tap into. We must look at the medium- to long-term strategy. We are lacking in terms of niche products and value-added products - we have only concentrated on volume and the low end of the market," Mlauli said.