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Stals sees profit in caution as rand climbs
Lower interest rates and less inflation may flow from modest economic growth, writes SVEN LUNSCHE
However, Stals shared the consensus emerging on upbeat financial markets that the rand should stabilise this year. On Friday the rand rallied to its best level against the US dollar since early December. More significantly for consumers, Stals held out the prospect of lower interest rates if his tough action of the past few months achieves its desired effect - a slowdown in credit demand and money supply. In an interview on prospects for 1997, Stals was sanguine about economic growth: "The cyclical growth pattern is clearly working. After three years of steady growth, 1997 will be a year of consolidation." His forecast is based on a significant slowdown in consumer spending to 2,5% this year, a marginal increase in government consumption spending, and slower fixed investment outlays. Stals emphasises, however, that the more modest growth scenario should result in a marked improvement in the balance of payments position, and put downward pressure on bank credit extension and inflation. He expects an average inflation rate of below 10% for 1997. Stals is confident that the deficit on the current account of the balance of payments - expected to come in at R10-billion to R12-billion in 1996 - "can be halved again this year". That in turn should boost low foreign reserves which have made the rand a target for speculators over the past year. If the scenarios on the balance of payments and credit extension materialise, says Stals, "there could be some alleviation on the interest rate front". Most economists expect a cut in the prime rate from 20,25% to 19,25% by mid-year followed by a further one percentage point cut in the second half of the year. Stals is most optimistic about the performance of the rand, predicting a modest 7% to 8% decline this year in line with inflation differentials with the country's major trading partners. Last year the currency lost 29% against the US dollar. "There is a better understanding of our economic policies and greater political stability. There is also a realisation that exchange controls cannot be lifted in a big bang if we don't have the foreign exchange reserves to back the currency." Stals says some regulations could be lifted "if the prospects look better for the reserves and the current account". The rand on Friday achieved its best level against the US dollar in seven weeks when it closed at R4,64, after briefly touching R4,63 during the course of the day. Dealers said a consensus was emerging that the rand would stabilise in 1997. "Unlike last year, an environment characterised by more positive than negative factors can be expected to impact on the rand in 1997," Standard Bank said in a review this week. The bank forecasts a R4,9 rate to the dollar by year-end. Constantin Vayenas, emerging markets analyst at UBS in London, told Reuters that South Africa should be a recovery story in 1997 with the weaker rand boosting the trade balance and foreign inflows reviving, lifting reserves from current poor levels. Last year's large current account deficit slashed the reserves to less than four weeks' import cover. But this year the deficit was expected to narrow as imports slow and exports get a currency fillip, while net foreign inflows should hit $3,4-billion, Vayenas said. That would lift official gold and foreign exchange reserves back to $4-billion by year-end from December's $2,2-billion. Government bonds firmed on Friday as a steadier rand encouraged buyers. Long-bond yields have now fallen some 60 basis points to the best levels in three months.
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