Gains in rand won't stop recovery: Absa
September 29, 2009
By Mariam Isa
Economics Editor
SA's economy is still on track to recover in the final quarter of this year despite hefty gains in the rand, which should be sustained in the year ahead, a top local bank said yesterday.
There has been rising concern that the rand's gains of about 28% against the dollar in the year to date will threaten an expected recovery, by undermining the competitiveness of local exports.
But Absa Capital's research head, Jeff Gable, said a rebound in commodity prices and the global economy would help SA to emerge from its first recession in 17 years, and support the rand.
"Notwithstanding the rand's recovery, improving external demand already evident in some commodity markets will help kick-start our economy."
Absa Capital sees the rand at an average of R7,33/ in the fourth quarter not far from a 13-month peak at R7,29/ scaled earlier this month. The unit was trading at R7,40/ late yesterday.
Next year, the currency will average R7,42/, its forecasts show. "The rand will remain quite strong for quite a while," Gable said at a quarterly briefing on the economy. He believes revived global and local demand will help to offset the negative effect of the strong rand on manufacturing and mining exports.
But another leading local bank, Investec, warned in a research note yesterday that the rand's strength posed a threat to SA's expected recovery.
"The rand's strength ... will damage SA's nascent recovery at year-end if the currency's strength is prolonged," said economist Annabel Bishop.
Investec believes the Reserve Bank should cut interest rates once again to boost business and consumer confidence, which still remain weak.
Official data showed yesterday that company failures fell 7,3% in the year to last month, while bankruptcies dived 51,8% in the year to July, backing evidence SA is emerging from its recession.
Figures last week showed that SA's leading business cycle indicator - which predicts trends in the economy in six to 12 months - dipped in July after rising for three months in a row.
"We believe that the upward trend is still intact and we don't view the drop in July as a reversal of the upward trend, just a slight pause," Reserve Bank economist Ian Venter said yesterday.
Gable said job losses in SA were set to continue in the third quarter of this year, even though the economy was likely to stop shrinking in that period.
Consumer spending, the economy's main engine, was likely to revive in the final quarter of this year, he said.
This would generate growth of about 2,2% in gross domestic product (GDP) in the fourth quarter, although the economy would still contract 2,1% in the year.
Next year, when SA hosts the Soccer World Cup, economic output was set to grow up to 2,5%. Gable said the event's effect on SA was likely to be modest, generating up to $1bn for the economy.
Improved global risk appetite would support capital inflows and foreign direct investment into SA, which was "very favourable" for the rand, he said.
They would also help finance the deficit on the country's current account " its broadest measure of trade "which would in any case shrink as improved global demand boosts exports.
Absa Capital sees the current account deficit at 4,4% of GDP this year, down from 7,4% last year, which was a 36-year peak. The shortfall, historically viewed as the Achilles heel for the rand, would narrow to 4,2% next year.
Outgoing Reserve Bank governor Tito Mboweni has expressed "concern" at the rand's strength but his comments " seen as verbal intervention "have had little effect on the currency. In line with market consensus, Absa Capital sees "little prospect" of any direct intervention given the cost in local money markets.
The resilience of the rand's recovery may help allow the Bank to leave local interest rates lower for longer by muting some of the inflation pressures in SA. These included "generous" wage hikes and household utility prices that were rising much faster than the latest inflation rate of 6,4%, Absa Capital said.
Most economists believe the Bank will not cut interest rates any further, and Absa Capital predicts one cut only in the third quarter of next year.
isam@bdfm.co.za
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