Oil price
A strengthening local currency makes crude oil cheaper for South Africa to buy, which in turn makes fuel cheaper for local companies to produce and then sold off cheaper to motorists.
A stronger Rand and dwindling oil price, as has been prevailing on markets recently, led to a significant fuel price cut bringing prices to levels last seen in 2007.
The strength or weakness of the Rand, among other factors, controls inflation giving consumers the ability to purchase more or less with the same amount of currency as was previously possible.
The textbook definition of inflation is the rise in the general level of prices of goods and services in an economy over a period of time.
Plainly put, inflation means a consumer is getting less goods or services for the same amount of money as he or she was getting yesterday.
Currencies are sensitive to the slightest changes and perceptions in the market and of particular interest to international investors will be South Africa's general election in late April this year.
“The Rand is set to strengthen in the first half of the year, but if certain risks like election violence do play out, investors are going to be hesitant to invest in the country.
“Also, if the global recession intensifies, investors are going to practice emerging market risk aversion, which means pulling capital out of developing countries and pumping it into developed economies,” Econometrix Treasury Management (ETM) economist Russell Lamberti told BuaNews, Monday.
By late afternoon on Monday, the Rand had slid almost 2% against the dollar bringing the Rand/dollar exchange to R9.98.
While the Rand/dollar exchange could strengthen to about R8 in 2009, Lamberti said possible volatility in the new year could also see the Rand weaken to over R10 to the greenback.
Sharing his sentiment, Nedbank Chief Economist Dennis Dykes explained to BuaNews their official forecasts expect the Rand to weaken to about R10 to the dollar in the first half of 2009.
“We do see some improvement in the Rand later in the year ... all of this is, however, dependant on investor confidence in emerging markets and confidence globally,” Dykes said.
While some economists believe the Rand will hover around the R10 level to the dollar in 2009, Investment Strategist at Investec Asset Management, Michael Power told BuaNews the Rand will reach R11 at some point in the year.
“I see the Rand being weak this year due to the fact that there is no abundance of global capital [brought about by market liquidity shortage].
“The Rand will strengthen in 2010 though,” Power said, Monday.
Professor Benjamin Smit, Director of the Stellenbosch-based think-tank, Bureau for Economic Research (BER), on Monday said their forecast puts the Rand at an average of R10.26 to the dollar for 2009.
In the first quarter of 2009, the Rand is expected to weaken to R10.60 to the dollar, regaining some strength to level off at R9.70 in the fourth quarter of this year, Prof Smit told BuaNews.
Going into the first quarter of 2010, the Rand will linger around the R9.64 level to settle at R9.75 in the fourth quarter of 2010 the BER forecasts.
Developments in the economy of the United States and an escalation of violence and conflict in the Middle East, together with a sudden surge or slump in oil prices will all affect the Rand in the year ahead, economists agree.
Article published courtesy of BuaNews
