Tuesday, June 30, 2009

We can't export our way out of trouble as the Depression Economics reverses Globalisation

“The rand is overvalued by about a third. We see it at R10,25 at the year-end, and fair value at R12/ in the longer term.” - Peter Attard Montalto, Nomura, London

In Nomura’s opinion SA can only sustain a current account deficit of 3,5% of gross domestic product (GDP), versus 7% in the first quarter of this year.

It also takes into account the likely negative effect of the country’s growing budget deficit, which Finance Minister Pravin Gordhan says is set to exceed its original estimate of 3,8% of GDP this year.

For the rand bears, a weak currency is not a bad thing — it will boost demand for local exports when the global economy picks up momentum later this year.

SHOOT: Any country hoping to export its way out of tropuble is mistaken. We've gone into globalisation-in-reverse. It's a permanent shift. Local production, hyperlocal living is going to become the order of the day as we shift to De[ression-era economics.

THE rand surged to a near 10-month peak at R7,87/ yesterday, in a move which may prove to be a double-edged sword for SA’s faltering economy.

The unit’s gains of about 20% against the dollar and the euro in the year to date is bad news for the embattled manufacturing sector, as it makes exports less competitive.

But its appreciation will also help ease inflation pressures, which means interest rates may fall again or at least remain lower for longer, helping to revive growth in the economy later this year.

Standard Chartered sees the rand strengthening to a robust R7,60/ during the final quarter of this year, based on expectations that emerging market assets will be firmly back in vogue by then.

But the Bank’s unexpected decision to keep its repo rate steady at 7,5% last week is one of the main reasons why the unit has outperformed its emerging market peers in the past two days.

In that context a strong currency doesn’t help, but it will help bring about lower inflation.
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