Rand hampers economic confidence

Johannesburg - South African economic confidence fell in September as a stronger rand was expected to suppress exports and interest rates were seen rising earlier than previously expected, a poll showed on Thursday.

The Reuters Econometer - a forward-looking index that measures six weighted indicators - fell to 241.51 in September from 247.90 in August.

While the economy was expected to grow next year, after its first recession in 17 years, a stronger rand was seen limiting the extent of the recovery.

The median consensus for GDP was a decline of 1.96% this year, before a 2.35% rise next year and 3.61% expansion in 2011.

"Indications are that local economic activity is improving... we don't expect a sharp increase because it's been a fairly deep recession," said Salomi Odendaal economist at Citadel.

The GDP and the rand have a 25% weighting each in the Econometer and heavily influence the outcome.

The rand was expected to end this year at 7.95 against the dollar and be at 8.34 by the end of 2010, both forecasts much more bullish than August's.

"The strong rand will (undermine) the competitiveness of exports, and because of that you are going to miss out on export led-growth, which you need at the beginning of the cycle to kick-start the economy," Citadel's Odendaal said.

The rand has firmed by more than 25 percent against the dollar so far this year, gains central bank Governor Tito Mboweni warned could lead to imbalances in the economy.

Mining and manufacturing output has fallen sharply and the strong rand might weigh on these sectors.

Inflation outlook

Headline consumer inflation is seen continuing its downward trend, averaging 7.21% in 2009 and 5.70% in 2010.

Inflation has been outside the central bank's target of between 3% and 6% since April 2007. It has slowed gradually since peaking close to 14 percent in August last year and stood at 6.4% year-on-year in August this year.

As the inflation outlook has improved, the Bank has cut interest rates by 500 basis points since December, taking the repo rate to 7.0%, in an effort to stimulate the economy.

While analysts polled saw a slight chance of another rate cut in this loosening cycle, most said interest rates will start rising next year as the economy recovers.

The median consensus for the repo rate was at 6.88% by year-end and rising to 7.18% by end-2010.

"Essentially it is just a normalisation of policy... moving up from the current levels. We think this is likely to start round about the third quarter of next year," said Ian Marsberg, macro strategist at Absa Capital.

"The economy is already showing signs of recovery and at that time the economy will be growing strongly enough for the central bank to take that move."

- Reuters