The strength of the rand warrants a further rate cut, Metropolitan Asset Manager’s economist Rejane Woodroffe said in her latest economic overview.
“The sustained strength of the rand has continued to surprise industry, consumers and economists alike and paves the way for a further interest rate cut at this year’s final monetary policy committee meeting,” Woodroffe said.
“We expect a 100-point basis cut to be sufficiently aggressive given current economic conditions. Although the rand has managed to continue strengthening in the face of aggressive interest rate cuts this year, it now looks stretched,” Woodroffe commented.
She said the United States dollar will come under further pressure as the US current account deficit continues to widen. Given that the Asian central banks are loathe to allow their currencies to strengthen, the South African Reserve Bank (SARB) may need to carefully consider its role with regard to the local currency.
“If it does not intervene in a significant way, other currencies, such as the rand, will bear the brunt of any further US dollar weakness,” she said.
The rand reached this year’s best level of R6,09 per dollar on December 3 from R7,07 on November 7 and levels above R9 per dollar in January.
The real effective trade-weighted rand has gained about 20% since the SARB announced it first interest rate cut this year in June and is at its strongest level since 1995.
The SARB’s monetary policy committee meets on Wednesday and Thursday and the key question is whether the rate cut will be one of 100 basis points, or 150 basis points.
So far this year, the SARB has had an equal spilt between the two options, with 150 basis points cuts in June and October, while cutting by 100 basis points in August and September.
At the beginning of the year, the median forecast of economists had been that there would only be a 300 basis point cut in interest rates this year, after a 400 basis point increase last year. This, in turn, meant that they expected GDP growth this year to be near 2% from last year’s 3,6%.
One of the main reasons why the SARB has cut faster and deeper than expected is due to the strength of the rand. Very few economists expected the rand to go below R8 per dollar this year, let alone R7 per dollar.
In September 2002, the 12-month view on the rand by fund managers was that it would be at a median of R10,94 per dollar; the benchmark 10-year government bond, the R153, yield would be at 11.57%; the repo rate would be at 12,15%; and earnings of listed companies would have grown by 15,4%.
Instead, the rand closed at R6,95 per dollar on the last day of September 2003; the R153 bond yield closed at 9,15%; the repo rate was 10%; and earnings are flat to slightly negative.
Woodroffe said the rand’s current strength is already severely impacting on the earnings of mining and manufacturing companies.
“As seen in the latest National Account figures, manufacturing output was negative in the first three quarters of this year due, for the most part, to the rand’s recovery. Import figures, on the other hand, are robust, resulting, for this first time this year, in a trade balance deficit for the month of October.”
South African exports topped $3-billion for the sixth consecutive month in October — the first time ever that they have achieved this feat.
Monthly imports topped $3-billion for the first time in September 2003 after they rose by 40,2% year-on-year (y/y) to $3,087-billion after a 29,5% y/y increase to $2,824-billion in August. In October they rose by 34,1% y/y to a record $3,5475-billion.
In the first half 2003 exports increased by 16,1% y/y in US dollar terms to $17,446-billion, while last year exports rose by only 1,5% to $29,9-billion.
Exports have risen by 18,9% y/y in the first 10 months, while imports have surged by 29,9% y/y over the same period.
The very strong export performance is contrary to the common perception that the strong rand will hurt South African exports.
“Furthermore, it is doubtful whether one can expect the same robustness of growth in commodity prices as was seen this year,” Woodroffe cautioned.
Gold is currently trading above $400 an ounce from $325 a year ago and $275 two years ago, while platinum reached a 23-year high of $803,50 an ounce on December 8 from $600 a year ago and $450 two years ago.
“At the same time markets typically trade in thin volumes as the year draws to a close, therefore, currency and bond markets can be expected to be quite volatile,” she concluded. — I-Net Bridge