P e r s p e c ti v e

extract from MMS Service 03-Jul-02

EUR Strength not all good news      03-Jul-02
     
The weaker USD trend exacerbated by the corporate scandals of late might not be cause for celebrations just yet. George Soros last week suggested that the bear market in the USD has just started and stated that the USD could still depreciate by one third of its current value in the next few years. Investors with exposure to a weakening USD would be both delighted as in the hedge-funds, or worried as in Japan, whose primary export partner is the US. Their growth is dependent on a weak Yen which the BOJ has tried in vain to achieve through its intervention tactics of late. Europe is still largely believed to be unaffected by the USD, as illustrated by ECB officials who as yet do not seem perturbed about the recent run against the USD. In reality however, the truth is far more gloomy. The Eurozone's future growth is largely dependent on growing their export market. Domestic demand has been steadily declining and the ECB should be well aware of this. A substantially firmer EUR may therefore have negative growth connotations. SA However similarly to other countries trading with Europe, could have something to gain from a stronger EUR, although it would not all be good news. SA Trade is made up of 35.7% of trade with Europe and 15.5% trade with the US, however the relationship between imports and exports between SA and the Eurozone has been moving in SA's favour over the last few years. This is evident in the trade data which shows that SA imported 41% more than it exported in 1997 with that amount reduced to 21% in 2001. This is very promising for SA and a stronger EUR would obviously encourage this further. Inflation is the part of the equation that could however prove a potential problem. A strong EUR could cause SA to import inflation once again regardless

of the trade balance between the two countries. Inflation targeting will be placed under pressure translating to a tighter than necessary monetary policy and correspondingly restricted growth. There is however a possibility of an offset via the USD component. A weaker USD would provide SA with reprieve to the imported inflation via the oil sector, but a consideration is that SA being a commodity driven country would suffer in terms of the prices of the local commodities mined. Commodities being priced in USD would return less in nominal terms than they did before affecting the farming and mining sectors negatively.

The answer would therefore be to continue promoting SA exports to Europe so as to steadily reduce SA's trade gap to zero and buoy local industrial growth.

 

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e c o n o m e t r i x 03-Jul-02