South African banking group Absa chief economist Christo Luus is forecasting that the rand will move to R6,50 to the United States dollar in 2004.
The South African rand remained below R7 per dollar in early trade on Wednesday, after breaking this level on Tuesday for the first time in three years. Tuesday’s move started on the back of a stronger euro and gained momentum when stop losses were triggered at the R7,05 per dollar level, which was previously this year’s best level.
At 10am, the rand was quoted at R6,9650 to the dollar from a New York close of R6,9526.
Speaking at an agricultural outlook conference in Pretoria on Wednesday, Luus said he saw many problems in the world’s three major economies, namely the US, Japan and Germany.
The problems facing the US include a sizeable asset bubble, corporate over-investment, large private sector debts, a hefty government deficit as well as a large current account deficit.
A likely future event is the bursting of the residential property bubble, especially in the major developed markets, Luus said.
“In South Africa, house prices have doubled since 1998,” he added.
Regarding the direction of South Africa’s prime interest rate, Luus said Absa is forecasting that the South African Reserve Bank will again cut the repo rate at the October 2003 and February 2004 monetary policy committee meeting, which will result in a prime rate of 11,5%.
Prime is at present at 13,5% after having been cut three times since June, when it was 17%. Last year prime rose by 400 basis points in response to a weak rand at the end of 2001.
However, he said Absa did not expect a repo cut at the December monetary policy committee as the Reserve Bank would not want to encourage consumers to overspend at Christmas time.
The key risks Luus identified for the rest of 2003 and 2004 were global eco-political risks and structural problems in the world economy.
“There is a risk of a recession in the US and in turn the global economy,” he added.
On the domestic front, Luus saw political events such as the 2004 elections as posing a potential risk as well as there being the risk of a local recession. — I-Net Bridge