By Ron Derby, 13 November 2012
WITH the South African economy I’ve come to understand one thing: which is that every bit of good news is accompanied by something that will offset some of the positives.
Take the rand.
While it has come under some significant pressure this year, next year looks as if it will prove much better for the currency. The pressure this year has been because of global growth fears that have translated into weaker commodity prices — and the self-inflicted wounds from unrelenting strikes across various sectors of the economy.
But SA’s terms of trade, the value of a country’s exports relative to that of its imports, are expected to improve, which is rand positive. According to Investopedia, if a country’s terms of trade are less than 100%, there is more capital going out to buy imports than there is money coming in. A result greater than 100% means the country is accumulating capital.
There is growing consensus that next year the prices of gold and platinum versus that of oil are going to move in ways supportive of the local currency, which has slumped more than 8% against the dollar this year.
Because of the US Federal Reserve’s continued quantitative easing and the European Central Bank’s purchases of bonds already trading on the secondary market, the outlook for risk assets going into next year remains supportive.
According to a research note from Bank of America Merrill Lynch, gold is expected to reach $2,400/oz over the next two years. It would average $1,850/oz in the next one, about 10% higher than this year. The US bank expects platinum to be about 9% higher next year at $1,700/oz.
Talking his own book no doubt, Impala Platinum’s head of marketing was quoted in Hong Kong as saying the metal was heading into a deficit situation this year already because of production problems that have plagued the sector.
Brent crude oil is seen declining 3% to $110 next year.
Should all the three forecasts turn out to be true, they would all be supportive of SA ’s terms of trade and in turn the rand. Combined platinum, gold and oil have a significant share of the country’s trade basket.
But here’s the curve ball. As the value of our exports rises, so do our income levels and consumption, which means the level of imports rises even further. During the commodity boom of 2002-07, import demand rose an average 17% year on year, according to the Bank of America Merrill Lynch, resulting in the current account deficit widening to 7.2% of gross domestic product (GDP) at the end of 2007.
Increased income and consumption in SA that may be derived from stronger commodity prices have the undesirable effect of boosting imports. If the government goes ahead with its more than R800bn infrastructure spend to support the economy, we’ll also see increased pressure on the current account deficit as some of that money will leave the country.
So there are the two stories with the rand. Commodity prices may find themselves in a much more supportive environment next year, which will boost SA’s terms of trade and the rand, but an increase in domestic income normally leads to a healthy pickup in imports. This would soften any correction we could see in the local currency.
CREDIT must be given where it’s due. In this case to Greek legislators. They’ve done the difficult part of winning further support from international lenders by passing through unpopular and riot-inducing austerity measures over recent weeks.
What’s left is for the troika made up of the European Union, the International Monetary Fund and the European Central Bank to unlock the next tranche of funds the country so desperately needs. Instead, the troika appears unsure on how to downsize Greece’s debt to GDP ratio to 120% in eight years from about 189% this year.
Unfortunately for Greece, the keys to the bank look likely to remain closed until the troika figures out how to get the country’s debt to sustainable levels.
This is how it feels to lose fiscal sovereignty — something that Spain’s politicians are trying to avoid at all costs.
Source: Business Day Live