Category Investments

Good for us…

27 December 2004 Angelo Coppola

Rian le Roux, Head of Economic Research at OMAM SA, reports that South Africa has, over the past few years, experienced both the sweet and sour aspects of China's impact on the world economy, but the effect on the local economy has, on the whole, been ove

By far the biggest benefit to South Africa has been the huge rise in industrial commodity prices over the past four years.

This has had several spin-offs on a macro-economic level and has strongly boosted our foreign currency export receipts and provided an important fundamental source of support for the rand.

Add to this our still relatively high local interest rates, and the result has been a huge net inflow of capital into South Africa.

This, in turn, enabled the Reserve Bank to square off its outstanding commitments in the forward currency market and begin to rebuild our foreign exchange reserves.

But, it has also helped to sharply strengthen the local currency. While the strong rand is unquestionably a double-edged sword, its strength has helped to drive inflation down and paved the way for a sharp decline in local interest rates.

This has also enabled local producers to overhaul domestic production facilities by using the strong rand to import machinery and equipment cheaply.

The net result of this will ultimately be a long-term rise in productivity that will, at least partly, offset the impact of the strong rand.

On the down-side, exporters of manufactured goods, whose exports have not enjoyed the benefit of sharply rising dollar prices, have taken a big hit in terms of profitability.

Much the same goes for local producers competing with imports, irrespective of whether those imports come from China or not.

On a broader macro level, production and employment growth in SA have not benefited as much from strong global and local demand growth as could have been the case had the rand not been as strong.

On the whole, South Africa has undeniably benefited from China's dramatic appearance on the global economic scene. If good productivity growth can be maintained in this country, the benefits going forward could be significant.

If not, however, the local economy could stand to lose much.

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