Current global economic turmoil is unlikely to “impoverish” South Africa and there is some good in the weaker rand, says First National Bank Chief Economist Cees Bruggemans.
Commenting on the falling rand yesterday Bruggemans said the good news is that it is the shock absorber of the moment, shielding the economy from fallout from global credit and banking contagion.
“It remains to be seen, however, whether there will be back-to-back bad news, if the SA Reserve Bank (SARB) were to raise interest rates to neutralise the effect of the weaker rand.” he said.
Seven months into the US “housing-cum-credit-cum-banking debacle”, things were still worsening drastically.
The US dollar, now 1,58/Euro, is clearly on skids. In coming months, the dollar could be expected to explore 1,60 to 1,75/Euro territory.
The good news is that SA’s two precious metals - gold and platinum -and 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 sheilding us,” he said.
“At the same time, the world prefers to blithely ignore all of this, instead fixating on our large current account deficit of over seven percent 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 of the weaker rand at 8,20 against a dollar that is itself weakening at 1,58/Euro.
With this US-cum-global financial crisis feeding the anxiety, buying oil might remain popular until the crisis finally ends, Bruggermans said.
Meanwhile, the rand also apparently faced more weakness in tandem with the dollar’s descent. Another 10% to 20% loss would take it to nine to 10/US dollar.
“If oil remains the global grease of last resort for the high rollers, it’s 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.”
That would inject a lot more income than what was currently being lost due to slowing spending momentum.
“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 lineup.”
Extract from The Witness