There is potential for the rand to tend to be weaker due to the current-account deficit, but more than anything the currency’s fortunes will depend on the strength of the global economy, according to Dr Azar Jammine, director and chief economist of Econometrix.
Jammine said on Monday his view is for the rand to weaken from R7,01 to the dollar in 2007 to R7,39 per dollar in 2008 and then to R7,83 in 2009. He then sees it remaining reasonably stable at R7,86 in 2010.
“The rand should be between R6,50 and R7,60 per dollar if the economy continues at this pace. But there is a 30% probability of the rand weakening dramatically [due to a global financial implosion],” he explained.
Jammine added there is a 60% chance of it depreciating slightly — although not dramatically — but this depends on commodity prices, which in turn depend on China not slowing down.
He pointed out that according to former Federal Reserve chairperson Alan Greenspan, the probability of a United States recession was recently placed at 1:3. He says Greenspan has now revised it to greater than 1:3, but less than 50/50.
Thus there is a 40% to 45% chance that the US could go in recession and therefore that much chance that it could slow down Asia.
“This means there is a 3:5 probability of a continued Goldilocks environment. There is also a view Asia now has enough momentum of its own to buck the trend of a declining economy in the West — I am not yet entirely convinced,” said Jammine.
“The signs of slowdown in the US are not particularly unequivocal just yet, and subprime could take longer to slow down than we had thought and therefore longer to slow Asia,” he added.
Jammine said that there is little sign yet of commodity prices slowing much. “The fundamental reason is because for so many years they have languished at low levels. Now China is growing at 11,5% with incredible demand for commodities and there hasn’t been enough time to develop new sources of supply — hopefully it will come from Africa, but it is going to take time.
“The second factor is the weakness of the US dollar — if it is weak against all currencies, commodity prices have to rise in terms of the weak US dollar.
He added: “Another factor is that Billiton is making an offer for Rio — the biggest is bidding for the second-biggest. What we have seen in the last decade, there is huge merger and acquisition activity in the mining industry, leading to an increase in concentration of ownership and the big three [including Anglo] can increasingly control how much is produced and keep the market short.
“The other factor is phasing out forward cover — there is a lot of supply that used to come in that is being taken out.”
Jammine also highlighted the fact that speculators are playing a role in driving commodity prices, which could be impinged if the US slowed down. — I-Net Bridge