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Johannesburg - A weaker rand is unlikely to tick up as quickly as it did in 2001, cautions a research report by Rand Merchant Bank (RMB).
According to the banking institution the rand is not as undervalued as it was then, when the currency fell to a historic low of R13.85/dollar. Although some analysts then predicted that the rand would devalue to R20/dollar, this did not happen. In 2004 and 2005 it strengthened to just under R6.
According RMB, conditions are very different today. Resources prices rose sharply in 2002 and 2003, supporting the rand. At the same time, the dollar began to weaken, with the South African economy even showing a small surplus on the current account.
The Reserve Bank had also begun to lower interest rates sharply. But with last year's weakening of the rand, interest rates remained largely unchanged.
RMB says that the rand is now geared for further weakness, possibly to R15/dollar.
The central bank has only limited policy options it can exercise, and will probably postpone interest-rate increases for as long as possible.
A much more likely expectation is that restrictions will be placed on foreign investment, which will effectively involve the repatriation of foreign assets to South Africa. This will probably occur if the rand weakens to R14/dollar.
Should the currency continue to weaken, the authorities could turn to the International Monetary Fund (IMF) for assistance. "Although this is not our core scenario, there is the possibility of considerably weaker exchange rates than people have now in mind."
Moody's Economy.com reports that in these circumstances the Reserve Bank will face a dilemma. It is preferable to relax monetary policy through lower interest rates, thus stimulating domestic expenditure and investment.
Fears of a weaker rand would probably oblige the Reserve Bank to adopt a gradual approach to policy relaxation. "The rapidly deteriorating economic conditions require more aggressive rate cuts."
The first meeting of the Reserve Bank's Monetary Policy Committee (MPC) for 2009 will be on February 10 and 11.
At that point economists anticipate a cut of at least 0.5 percentage points.
Forecasts as to what could happen in the American and other economies cast a shadow over prospects for the South African economy. Morgan Stanley's core scenario for the US economy this year is a deep recession, with real economic growth of -1.9%.
Improvement is conceivable only in 2010 with a dollar that could initially strengthen moderately, but subsequently decline aggressively.
In another report Morgan Stanley points out that the decline in American consumer expenditure holds far-reaching implications for other countries, especially East Asian export-focused economies.
For more business news in Afrikaans, go to Sake24.com
- Sake24