Rand the biggest wild card for SA economy in 2011
“As we know, the currency is probably the most ‘unforcastable’ factor in our economy,” he observes. “In 2010 the rand was the third-strongest major currency in the world, due to uncontrollable factors like positive foreign investor sentiment, the favourable theme of emerging markets, attractive interest rate differentials with the rest of the world, and slow recoveries and high debt levels in developed markets. This kept our inflation in check, allowed interest rates to fall to 35-year lows and consequently helped boost consumers’ incomes after a tough 2008-09.
“In 2011, however, it’s possible that this could unravel, although we don’t believe it’s likely. However, we do believe the rand is over-valued at its current levels, and some of the factors that made the rand attractive to offshore investors last year are becoming less supportive. For example, rising inflation in certain emerging markets is causing them to raise their interest rates, making SA interest rates relatively less attractive, especially since we expect our rates to remain largely unchanged for the year.”
At the same time, le Roux adds, emerging market growth could slow somewhat relative to developed markets as higher interest rates act as a drag on the former, while the latter continue to enjoy easy money and economic growth accelerates. “This means investment conditions are now somewhat less favourable for emerging markets in 2011 than they were in 2010. At one end of the scale, China’s inflation and any consequent policy tightening will be keenly watched for their negative impact on growth. At the other end, we’re already seeing stronger-than-expected growth data in the US, which could turn out to be the global ‘surprise’ of 2011 and help swing investor sentiment back towards developed markets. This could contribute toward rand weakness.”
A sharp rand depreciation would be a threat to the SA economy by sparking inflationary pressures – especially with rising oil and food prices threatening globally, says le Roux. While the speed and extent of any rand weakening is hard to predict, some softening would be welcome as a spur to economic growth, providing a boost to mining, manufacturing and other export industries, without aggressively fanning inflation risks. He has pencilled in an exchange rate of R7.50 per US dollar by year-end.
Assuming a moderate rand depreciation, a moderate rise in food prices and oil at US$95 per barrel, consumer price inflation (CPI) should remain within the SA Reserve Bank’s 3%-6% target band, but increase gradually to end the year around 5%, he believes. This means interest rates are likely to remain around their current low levels for most of the year, with the first rate hike seen only during the fourth quarter of 2011 at the earliest.
Such a scenario would prove positive for SA’s economic recovery, helping lift growth to around 3.5% in 2011 from the disappointing estimate of 2.8% in 2010, says le Roux. “However, there are still weak spots in the economy, like sluggish exports and fixed investment (including the public sector) that need to recover further to get this rate higher,” he points out. “And structural reforms remain imperative to reach the 7% growth rate targeted by the government and reduce high unemployment.”
Overall, he believes 2011 should be a reasonably good year for SA consumers and businesses as the economy gains momentum, individuals’ financial positions improve moderately further, and businesses consider more investment and hiring thanks to stronger earnings and a likely absence of economic policy shocks . Through its new partnership with the BRIC countries, the SA government also has an exceptional chance to generate new growth opportunities for the country in the year ahead, concludes le Roux.
