An expected weakening of the rand against the world's major currencies to a forecast low of 8.00 rand per US dollar around mid-2004 should offer some relief to South Africa's beleaguered exporters, according to Réjane Woodroffe, a portfolio manager and economist at Metropolitan Asset Managers (MetAM).

Reporting in MetAM's quarterly economic review, Woodroffe said the rand was unlikely to retain its current strength over the next six months and would weaken before strengthening again as the global economic cycle turned towards the end of 2004.

"With domestic demand being supported by lower interest rates, exports negatively impacted by a weak global economy, and the strong currency and lower interest rates offering a less attractive trade, all indicators point to a weakening of the rand in the short term," Woodroffe said. "This should offer some relief for export-driven industries particularly hard hit since the rand's  appreciation of more than 50% since December 2001," she commented.

"Domestic demand remains resilient and is expected to continue growing as the effects of interest rate cuts feed through over the next nine to 12 months. Basic Industries, General Industries and Cyclical Services will likely benefit from growth in consumer spending due to interest rate cuts."

She said although foreign money flows in the first half of 2003 had helped contain the potential negative effects of the widening current account deficit, the volatile nature of such inflows had seen flows turn negative in the past two months.

"This, coupled with a deteriorating trade balance, means we can expect to see the current account widen further towards year end," she cautioned.

Turning to the local equity market, she said concerns about global economic growth and the impact of the strong rand in the short term reinforced Metropolitan's cautious outlook for this market.

"Although valuations remain low, any weakness in international markets will quickly spread to the South African market. The performance of the resources sector depends on the rand and commodity prices. Despite doubts about an imminent global recovery, the dollar value of commodities has increased as commodity producers' currencies continue to strengthen against the weakening US  dollar.

"While the higher dollar prices are somewhat offsetting the negative effects of the strong rand, the rand's behaviour remains the key driver of earnings for local mining companies. In short, key risks to the local equity market remain a continued currency strength and weak global growth," she explained.

Looking to the bond markets, Woodroffe said lower inflation should support local bonds in the near- to medium-term, with short-term maturity bonds in particular showing value.

"The market is pricing in a further 1% cut before year-end, but we believe this is unlikely until early 2004," she concluded.

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