| In the wake of last week's budget, speculation on what to expect for
the ZAR through the remainder of the year has increased. There are a number of factors to
consider, many of them ZAR negative which point to an outflow from SA if they materialise.
To complicate matters further, there is also the unknown in the form of the effect that a
war on Iraq could have on the USD. Factors attributing to a weaker Rand Dollar
exchange rate are:
1) Finance Minister Manuel's budget for 2003/04 allowance for the liberalisation of
exchange controls. The unwinding of emigrants blocked funds, greater allowance for
companies to invest offshore and the reduction in restrictions placed on institutions
regarding offshore investment are all ZAR negative. The only consideration on this front
is the timing of the associated outflows with many of these outflows only likely to take
place towards Q3 and Q4 of 2003. It is fair to say that until such time as the global
economy starts to improve, that international investment prospects will be limited and
could in the short-term restrict the extent of any outflows. Given the current declining
interest rate cycles in which most developed nations find themselves, it will only be a
matter of time before growth starts to improve albeit at a less rapid rate than was seen
prior to the slowdown.
2) A second factor to consider is the strength of the local economy. The tax breaks
given will release a further R13.3bn into the economy over and above the increased
spending scheduled by government. Add to that the 300bp worth of rate cuts which are
expected through the year and SA economic growth is expected to average close to 3% for
2003. It is also safe to say that that growth will be concentrated in second half as the
effects of the rate cuts and tax breaks filter through. Given this outlook, the propensity
to buy imported goods may also rise fairly steeply especially when given the current
strength in the ZAR. All of these factors are therefore expected to conspire to help the
current account back into deficit with government holding a similar view, given that they
have forecast a current account deficit of 1.1% of GDP in 2003.
3. Thirdly, high local interest rates have been touted as one of the main drivers of
the ZAR's strength as it holds significant attraction over developed nations and other
emerging markets of similar credit rating. On this front, there is a significant chance of
interest rates dropping possibly by as much as 300bp if indeed inflation shows signs of
declining to levels well below the CPI(X) target of 6%. Such a development should see the
interest by foreigners in adopting a long ZAR position wane and may even trigger offshore
institutions to start reversing some of these existing positions. Therefore in conclusion,
if the simple facts are considered, then the risk favours the ZAR to weaken over the
longer-term. Given the lags that are associated with many of these negatives (ie the
timing of the outflows) however, the ZAR depreciating impacts may only be felt in several
months time and especially in second half of 2003.
In the short-term, much will depend on the performance of the USD and its reaction to a
war on Iraq. Although further gains may be seen on this front, appreciation on a trade
weighted basis may be more difficult to achieve given the ZAR will find gains against the
likes of the EUR and CHF more difficult to come by. |
