Rand fuels economic boom

[ches]

Cuts in interest rates and lower inflation were forecast for South Africa, as economists predicted that the rand would hold current levels well into 2005 as the dollar continues to weaken.

On Friday morning the rand was changing hands at R5.83/US$, R7.79/€ and R11.13/£. These levels were forecast to continue in the long term as the dollar battles structural problems in the US economy.

The rand's stellar performance was leading to economic growth in all sectors locally, said Absa economist Chris Hart.

The stronger rand had lowered South Africa's inflation rate to below that of its trading partners, and was attracting foreign investment.

"These kinds of factors are likely to help interest rates and fuel prices to come down. This will also help support higher growth... high growth with lower inflation is a good combination we have not had since the 1960s," said Hart.

He said despite exporters crying "buckets of tears" the stronger rand had many positive spin-offs for the rest of the economy.

"The competitive exporters will survive. One needs to look at the whole economy and despite their tears all sectors of the economy was growing. We are seeing investment potential in all sectors, not just narrowly based on commodities."

Hart added there were positive spin-offs for the mining sector.

"The price of gold is going up, so that is compensating for the strength of the rand. There are positive spin-offs for them."

Nedcor economist Magan Mistry confirmed that higher commodity prices would offset the effects of the stronger rand.

Hart said the textile industry could only survive if it stopped trying to compete with low-cost competitors like China.

"Some restructuring needs to be done. They need to find some niches... one has to look at adding value. Only the competitive ones will survive."

Standard Bank economist Monica Ambrosi said some companies would find it difficult to adapt to a stronger rand.

"Survival is going to depend on a company's competitive edge. There will be job shedding for businesses that cannot adjust to the strong rand."

Hart said if the strong rand really was bad for the economy the Johannesburg Securities Exchange would not be experiencing record highs.

Ambrosi said when compared to the other major currencies the rand was stable.

"We need to aim for currency stability. We are seeing some of that come in with the rand's performance against the euro and the pound."

For consumers the stronger rand would lead to debt relief through interest rate cuts.

"There is a good hold on inflation which could lead to more interest rate cuts which would provide relief to those in debt and have a stimulatory effect on the economy."

["http://www.finance24.com/Finance/Economy/0,,1518-25_1627353,00.html"]Source[/url]