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Time will tell

27 May 2004 Angelo Coppola

The dynamics flowing through the global economy will, inevitably, affect South Africa, says Martin Jankelowitz, head of markets and economic research at Investment Solutions.

It is perhaps more a question of degree.

Although as a small open economy, South Africa's financial markets are vulnerable to global dynamics, a combination of a sound macroeconomic policy, sound fundamentals, and a strong global economic environment should all contribute to some level of resilience.

SA's third democratic general elections went smoothly, confirming the stability of the country's political landscape, in absolute terms and relative to many other developing nations. Importantly, local economic news remains largely positive.

Clearly, the primary area likely to be affected by the changing global environment is the Rand.

It must be acknowledged that the global environment has become less supportive for the resource-based and carry-trade currencies and hence, the risks have increased.

But just as SA maintained Rand strength needed to be seen in a global context, similarly any weakness must be seen in the same light. A trading range of R7.00-R7.50 may be more likely.

Further evidence of the improving local conditions is recorded in the SARB's leading indicator of economic activity, which confirms the positive momentum in the economy.

The index improved over the past month and is up 10% year-on-year. The implication, clearly, is that local economic activity has recovered from the sharp downswing of 2003, when the effect of the strong Rand very negatively affected manufactured exports.

Indeed, both the BER's PMI and the SARB's leading indicator suggest local manufacturers are not only benefiting from the very strong local and global demand, but are also adjusting, albeit slowly, to the strong Rand.

Another indicator reflecting strong momentum is VAT receipts, which maintained the strong start to the year into March, rising 23.3% year-on-year.

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