The current global economic turmoil is unlikely to ”impoverish” South Africa and there is some good in the weaker rand, according to First National Bank chief economist Cees Bruggemans.
Commenting on the falling rand on Monday, Bruggemans said the good news is that it is the shock absorber of the moment, shielding the economy from the fallout from the global credit and banking contagion.
”It remains to be seen, however, whether there will be back-to-back bad news if the South African Reserve Bank were to raise interest rates to neutralise the effect of the weaker rand,” he said.
Seven months into the US’s ”housing-cum-credit-cum-banking debacle”, things are still worsening, drastically even. The dollar, now at about $1,58 a euro, is clearly on skids. In coming months, the dollar could be expected to explore $1,60 to $1,75 a euro.
However, South Africa’s two precious metals — gold and platinum — along with other rising commodity export prices are effectively paying for rising oil import costs.
”Unlike other parts of the emerging and rich world which don’t have such built-in hedges, we have natural protection shielding us,” Bruggemans said.
”At the same time, the world prefers to blithely ignore all of this, instead fixating on our large current-account deficit of over 7% of GDP. With differentiation rigorously applied, separating good girls [attractive surpluses] from bad girls [big deficits], the tendency is to sell us off.”
The result is a weaker rand at R8,20 against a dollar that is weakening itself.
With this US and global financial crisis feeding the anxiety, buying oil might remain popular until the crisis finally ends, Bruggemans said.
Meanwhile, the rand also apparently faces more weakness in tandem with the dollar’s descent. Another 10% to 20% loss would take it to R9,10 a dollar.
”If oil remains global-grease-of-last-resort for the high rollers, its rising price may prevent us from gaining an overall advantage from our rising precious metal prices. Only if our precious metals achieve a breakout relative to oil would our current-account deficit suddenly become positively transformed.”
So far the rand is 20% weaker than in 2007. That weakness could still grow to 30%, if not 40%. That would inject much more income than what is currently being lost due to slowing spending momentum.
”It argues in favour of higher interest rates later this year, in line with what happened in 2002. We are in the midst of a major disturbance that’s moving our cheese.
”Happily it isn’t impoverishing us as a country (oil is naturally hedged by precious metals and other exports), but the currency effects are rearranging the winner-loser line-up.
”The Reserve Bank may have to adjudicate that beauty competition, however unwilling it must be under present political circumstances. There’s the call of duty for you,” said Bruggemans. — Sapa