Economies counting on a quick end to war
Economic Watch Under the Microscope
Cheaper oil will ease inflation, but post-war rand predictions are divergent, writes Lukanyo Mnyanda
'In times of risk aversion, South Africa, which has a well-managed economy, will do better than other emerging markets'
The certainty of war gave an initial boost to the financial markets this week, the assumption being that conflict will be quick, ending in an overwhelming victory for the US and its allies.
Some economists say this is probably the best scenario for South Africa, which stands to benefit from a fall in oil prices and the resumption of global economic growth once the conflict is out of the way.
A quick war and a reduction in oil prices will ease the inflationary pressure and enable the Reserve Bank to join other major central banks in cutting interest rates, giving a boost to the local economy.
Tradek economist Mike Schussler says CPIX, consumer inflation excluding mortgages rates, could have been closer to 10% had it not been for the uncertainty of the past few months, which has kept oil prices above $30.
CPIX was running at 11.3% last month, compared with the bank's target range of 3% to 6%. The bank kept rates steady after the meeting of its monetary policy committee this week.
Schussler says if the war is quick and there are minimal disruptions to oil supplies, the return to the market of Iraq and Venezuela, whose production has been crippled by a nationwide strike, could create an oversupply and push prices all the way down to $21/barrel.
He disputes the pessimistic view that oil prices will remain around $31 for the rest of the year.
Alternatively, the war could end up being prolonged and messy, with serious consequences for growth, worldwide and in South Africa.
In these circumstances, Mandla Maleka an Eskom economist, says oil prices could hit $40/barrel, slowing the decline in inflation and delaying interest rate cuts.
A prolonged conflict will also delay a recovery in the global economy and this, together with a strong rand, will be a drag on the export sector, making the projected growth rate of 3% for the year unlikely. Exports account for 26% of economic output.
Not very clear are the implications for the currency, which has posted impressive gains against the dollar in the past 15 months.
One of the most volatile currencies in the world, the rand has been hard to predict and forecasts vary as to its likely direction.
Jos Gerson, a Merrill Lynch economist and consistent rand bull, calls it at R8 by year-end and R7.50 in the middle of next year.
Francis Beddington, economist at J P Morgan in London, calls it at R9 by year-end, compared with the market consensus of around R9.50. Beddington says the rand could reach R7.50 against the dollar within the next couple of months, citing the high interest rate differential in South Africa's favour as well as a high gold price as geopolitical tensions persist. "But [we] do not see this level as sustainable."
The consensus is that the currency is likely to remain at current levels. It has spent most of the week trading between R8.10 and R8.25.
As a net importer of oil, South Africa's current account could take strain from a prolonged conflict.
The currency could also suffer if the war slows the recovery in the global economy, leading to a deterioration in South Africa's terms of trade due to the proportion of commodities - which are sensitive to global demand - in the country's export basket.
"Historically, commodities have not only caused volatility, they have also been a key determinant of the rand's long-term depreciation - in nominal and real terms," says Beddington.
But the overall balance of payments should remain in good shape, shielded somewhat by a healthy capital account. (South Africa has emerged as a safe-haven emerging market.)
"In times of risk aversion, South Africa, which has a well-managed economy, will do better than other emerging markets," says Carlos Teixeira, emerging markets economist at Goldman Sachs in London.
Macroeconomic management has been endorsed by major credit rating agencies in recent months, with Fitch indicating that South Africa' s debt might receive a rating upgrade as early as June. These should also help attract capital.
Economists are less clear about the rand's prospects in the longer term, saying this will depend on what happens after the war.
The market's response to the certainty of war would suggest a swift recovery in the global economy, which should see a stronger dollar, if the US continues to outperform the eurozoneas expected.
This should put some downward pressure on the rand. The Reserve Bank's policy of building up reserves should also cap gains by the currency.
But there is debate on the timing of a global recovery, with some economists saying structural issues that were holding the economy back prior to the war - including concerns about rigid labour markets in Europe, balance sheets in the US and deflation in Japan - will remain.
Teixeira says the market bounce this week was a knee-jerk reaction. "The view that a quick war will lead to a massive spurt in growth is wrong.
We see [a return to] trend growth only later in the year or in the first quarter of 2004."