SA own bootstrap recovery possible - by Cees Bruggemans

JOHANNESBURG (November 20) - After two years of deepening hardship, in which interest rates have been increased ten times, prime rising to 15,5%, we may finally be coming to a turning of the financial cycle. Other shock absorbers have already been operational for some time, protecting the economy from the worst fallout of recent events.

The Rand weakened by 10% in 1H2008, and a further 30% in 2H2008, shielding many producers, especially miners, farmers, manufacturers, but also some service providers (tourism) and building contractors from adverse business conditions. The ultimate giveback was oil, collapsing in four months from $150 to $50, one of the more bizarre and rather unexpected developments of 2H2008. This oil gift assisted in protecting the country from the impact of falling export prices.

The Finance Minister furthermore continued government spending even as his tax revenue started to suffer from the slowing economy, indeed spending more on public salaries (pushed higher by inflation) and infrastructure. Thus despite private sector slowing this year, the public sector remained an important growth anchor. But with inflation finally peaking over 13% in 3Q2008, the die looks cast for a plunging inflation rate in 2009, with interest rates following at least a part of the way. With oil and food prices easing, and overdue statistical changes, the CPI inflation rate is set to plunge towards 6% by mid-2009. And this despite the weakened Rand and its implications for higher imported inflation. As the SARB acquires greater confidence regarding the upside risks governing the inflation prospect, especially regarding second-round salary effects and the global financial crisis implications for the Rand, the more willing it should eventually become to start easing interest rates. Prime could fall as low as 13% by mid-2009, and possibly somewhat lower by end-2009, depending on actual developments.

Such interest rate easing is likely to assist in stemming the inventory and private fixed investment cutbacks, if with a lag. Also importantly, it may influence replacement decisions by households regarding important consumption purchases such as cars, furniture and other household appliances and necessities. With the risk of higher interest rates waning as we move deeper into a rate-cutting cycle, and the debt servicing burden of households reducing as nominal incomes keep growing even as interest rates decline, households should become more confident to take on longer term commitments.

In the course of next year, especially by 2H2009, we may have some hope of the economy gradually reviving once again. If so, it will likely do so in tandem with the world economy, which by then is also expected to be growing again. Such global growth will be very much a function of a successful ending to the present financial crisis, the very aggressive interest rate easing we can observe around the world in progress today, and the equally aggressive fiscal boosting, especially in China and America but not limited thereto. Thus South Africa will probably pull itself up mostly by its own bootstraps next year, but it will be importantly assisted by the rest of the world also doing so. Together we will make it come true! If end 2008 will probably still be a rather bleak festive season as we collectively tighten belts going through the roughest patch of this cyclical adjustment, the 2009 festive season should already be a much more upbeat affair, by then well launched on our road to the 2010 World Cup. That would be great timing.

Cees Bruggemans is Chief Economist of First National Bank.

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