More rate hikes 'unavoidable'
Johannesburg - Further interest rate hikes of 100 to 150 basis points seem unavoidable to curb the strong growth in domestic demand in an effort to reduce the country's current account deficit, according to Sanlam group economist Jac Laubscher.
Next year's budget will also have to do its bit to curb consumer spending in order to allow for the negative impact of the planned infrastructure capital expenditure on SA's imports, and therefore current account, in the next few years, Laubscher contends.
He says that although a slowdown in global economic activity in the next twelve months is to be expected, it will probably only be moderate.
Runaway inflation is unlikely, as is a worldwide recession.
Support for commodity prices
The underlying support for relatively high commodity prices will remain intact, but will not be as excessive as it was prior to the correction.
The outlook for emerging markets as a group also remains positive, but the upward trend is likely to be more moderate once it resumes.
"However, it is also clear that investors are now making a greater distinction between emerging markets regarding their risk profiles, and in the context of a contraction in available capital globally countries dependent on continued capital inflows are so much more vulnerable.
Unfortunately, South Africa, with its current account deficit of 6.4% of GDP in Q1 2006, falls in this category, while the financing of the deficit owing to the uncertain outlook for direct foreign investment also does not instil confidence," Laubscher says.
Large-scale selling
He adds: "The decline in risk appetite will not be reversed soon, and South Africa cannot rely on the rate of foreign portfolio investment continuing at the elevated level of the past two years.
"Although there has been no question of large-scale selling of South African equities and bonds by foreigners to date, and the inflow of capital (including unreported transactions) has consistently exceeded the current account deficit since 2004, the sustainable level of the deficit is nevertheless under suspicion."
South African policymakers therefore have no option but to reduce the current account deficit to a more comfortable level, he asserts.
"At present the Reserve Bank has the unenviable task of containing the strong growth in domestic demand in order to achieve this objective, and further interest rate hikes of 100 to 150 basis points seem unavoidable.
"The weakening in the rand exchange rate will obviously help to bring about a smaller deficit in the course of time.
Budget to do its bit
"And let me say this now: unlike this year, next year's budget will have to do its bit to curb consumer spending in order to allow for the negative impact of the planned infrastructure capital expenditure on SA's imports, and therefore current account, in the next few years.
"In other words: SA's meagre savings rate, which dropped to its lowest level since 1949 last year, will have to be reversed in order to prevent SA's aspirations regarding economic growth remaining largely at the mercy of international capital markets."
But there is no reason to become pessimistic about SA's growth prospects at this stage, he points out.
Growth rate "achievable"
"A growth rate of about 4% p.a. for the next two years appears to be achievable; however, the composition of growth will change gradually, with the contribution by exporters and sectors competing with imports increasing at the cost of those sectors that benefited from exuberant consumer spending and favourable financial conditions.
"A shift from consumer spending to investment as a driver of growth also appears to be imminent. The end result could therefore well be a short period of lower economic growth, but growth that is more balanced and of a more sound nature."
News source: www.news24.co.za
Posted by: www.SouthAfrica-CarHire.com
