Investec economist Annabel Bishop says the bank is forecasting a fixed investment growth rate of 7% a year that, in the absence of significant domestic savings, means the current account is likely to remain in deficit.
“This would be exacerbated by the further importation of military equipment under the South African-Europe arms deal,” she adds.
“We expect oil prices will begin to decline this quarter and drop back to $35 a barrel next year. However, should high oil prices persist, they would place further pressure on the current account deficit.
“However, FDI and portfolio inflows and additional foreign bond issuance are likely to provide significant inflows on the financial account.
“We expect the euro will remain below $1,25 for the rest of this year and the first half of next year, which implies further trade-weighted rand weakness for South Africa and some ultimate upward pressure on inflation, in combination with further petrol-price hikes.
“Consequently, we retain our forecast that interest rates will stay on hold this year, with an expected 50-basis-point hike in February 2006,” Bishop adds.
She says, however, that interest rates are already low enough to stimulate private-sector capital investment, and with the government and parastatals continuing to upgrade and expand South Africa’s infrastructure, the country is likely to remain dependent on capital equipment imports and hence euro-sensitive. — I-Net Bridge