PREPARE TO MEET THY UPSWING

Posted On Friday, 22 February 2002 03:01 Published by
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Just over 20 years ago, flushed by the windfall from a gold price that seemed to have found a new level at over $600 an ounce,
Just over 20 years ago, flushed by the windfall from a gold price that seemed to have found a new level at over $600 an ounce, then SA Reserve Bank Governor Gerhard de Kock suggested his countrymen Prepare To Meet Thy Boom. He was on the money, temporarily at least, as the economy grew at 6% for a couple of years.

Nobody is making quite the same confident prediction just yet. But at the very least, South Africans should be confident of a significant economic upswing in the next couple of years. The spur this time is an exchange rate which has put a stunning 43% more into bank balances of exporters ? and virtually overnight given import replacement businesses the kind of competitive advantage they could only have dreamed about.

Now that the dust has settled with the Rand having stabilised, the country has suddenly become hugely competitive across a broad range of products and services. For the reality to sink in, consider the impact in Rands and Cents. Exported products fetching US$1 000 in global markets now injects R11 500 into the SA company's bank account. A year ago it was R8 000. The impact this has on profit margins ? and business growth generally - can hardly be over-emphasised.

So far stock market investors have focused on the most obvious beneficiaries of the currency boom. Particularly mining companies, whose profits and share prices have long been a measure of the swing in the Rand-costs, Dollar-revenue equation. But the impact of the Rand's plunge in the last six months promises to be far broader.

Imported machinery, for instance, has overnight become a lot more expensive. Some have naively suggested businesses will be hurt by having to cough up more. The reality, instead, is that demand has surged for 'previously owned' equipment, much of it re-engineered locally. Better appreciated is the impact on the global tourist class which has been quick to pick up on cheap local costs. As anyone who has tried booking a hotel room or hired car in Cape Town will attest.

The timing of the Rand's plunge, debilitating as it may have been on confidence, may also prove opportune. The biggest danger of any currency depreciation is the knock-on impact on inflation. On that front South Africa circa 2002 is being shielded by the global deflation cycle and locally, at last reaping the rewards of long-standing fiscal and monetary prudence. Inflation is certain to edge higher. But, critically, there appears little danger of it getting to the double digit levels which would force the authorities to raise interest rates. That is vital for the scale and length of any revival. The longer the cost of money stays at reasonable levels, the greater the growth momentum an economy can build.

On top of all these positive factors we can now add Finance Minister Trevor Manuel's significantly stimulatory Budget. Although most commentators have concentrated on the continued discipline in Government spending, inside the Department of Finance the thrust was for a Budget that boosts economic growth. As Deputy Director General Andrew Donaldson told the Moneyweb/Andersen post-Budget presentation: 'Last year's Budget was growth oriented. This year's is very growth oriented.' The point was made last Wednesday by his boss's announcement of a record R15 billion in personal income tax cuts and Government spending rising at an annual 4% in real terms through to 2005.

Donaldson added that the official economic growth forecasts (2.3% this year; 3,3% in 2002) have been conservatively pitched and reckons it would be no surprise to see significantly higher rates achieved. Anyone considering the broader picture would have to agree. If the global economic revival comes through as predicted later this year, locals may even be talking boom-time again soon. But at the very least, as a South African you should Prepare to Meet Thy Upswing.

Publisher: Moneyweb
Source: Moneyweb

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