It is tempting at times like this to abdicate all responsibility for writing any kind of economic comment. When the object of our affection - the Rand - plays unpredictably fast and loose, is there any point in adding to the noise? Well, maybe!

Last year at this time we remarked that the restructuring of the South African economy through the lowering of tariffs, downsizing the private sector and privatisation in the public, combined with the competitiveness of South African exports (aided by the new SA/US trade agreement) should see some feelings of prosperity creep into the economy during the year.

Well, that was true up to September 11 - but the subsequent plunge in the value of the Rand against all other currencies extinguishes that faint glow of well-being by year end. In every other aspect, however, our local economy looks robust.

It is that robustness and its opportunities which we need to focus on in the year ahead. The feel good factor will return if we concentrate on the positive and don't get distracted by the difficulties which we still face (not that we should ignore them - particularly crime, grime and Aids - but perspective is vital).

As to the Rand, what goes up, comes down, and vice versa - and the only question is the timing. There is no point in repeating the litany of causes (real or otherwise) which have lead to the recent plunge in value and which might - don't hold your breath - be uncovered by the recently appointed commission. Suffice it to say that for too long, too few players were in the market wanting to buy Rands and too many (or too much), selling - that is the long and the short of it. But for so long as we continue to run a positive trade balance, the more likely it is that there will be a recovery sooner rather than later.

The Rand's current plunge started a little over a year ago and has reached a proportion exceeding that which followed the Rubicon speech of 1985 (as we write this, a tentative recovery has commenced). But it should be remembered that, against a basket of currencies, the Rand recovered fully from the Rubicon plunge over a period of about 18 months and then continued to trend along the line of inflation and differentials between ourselves and our trading partners (i.e. following PPP principles), for the following 15 years - that's actually pretty stable in real terms!

The Rubicon devaluation was caused by a single political crisis of confidence in South Africa. The current devaluation, while having its immediate foundation in a multiplicity of different influences, is likewise caused ultimately by a political (in the broader sense) crisis of confidence. Some of these influences are beyond our control, but those which are not must be sensitively addressed. As we said last year:

"Confidence is a fragile thing and the rumour mill is triply dangerous in these days of Internet communication. ...a little sensitivity to these issues might go a long way [this comment was in relation to private sector pessimism]. Government must also appreciate that perceptions are frequently as important as reality and beware the onset of foot-in-mouth disease at senior levels."

This is unfortunately just as true today as it was then.

It seems unlikely that domestic interest rates will be hiked further as a defence mechanism to protect the Rand. Mr Mboweni has decided (correctly we think) that such a move would have no effect. The recent rate increase to protect the inflation target was unexpected and aimed (according to press reports) at discouraging profiteering on inflationary expectations. If that is the real reason it seems, with respect, a trifle curious.

Our own bet is that rates will remain largely unchanged for calendar 2002 (but slightly down again around mid-year) and that inflation will be just on the 6% target. There will be a significant increase in budgeted corporate tax revenues in fiscal 2002/3 and these are likely to be used to fund income tax cuts across the board in February's budget. South Africa's tax morality will get better (if only under threat of detection) and that bodes well for all.

Here are some thoughts for the future:

• The US economy is vast. Like a super-tanker or a charging buffalo, it is difficult to divert from its course, but once diverted, equally difficult to re-steer. US consumer confidence and spending remains high (as we go to press) in the face of substantial job losses, particularly in high tech, motor, financial and travel services. Although the principle US stock exchanges have rebounded from September 11, there remains a continuing concern that values are at historic and unsustainable highs relative to current and future expected earnings. A correction over the next six months remains probable, and a break in consumer confidence and extended recessionary spiral in that economy would then be almost unavoidable. Bin Laden-related defence spending will be insufficient stimulus to compensate.

• Proponents of nuclear power will slowly make visible inroads against the green lobby's opposition as generation capacity problems in industrialised countries demand the construction of new plants (fossil fuel, hydro, wind or nuclear) in the next global upswing. There is just not enough water for hydro or wind for wind farms; global warming concerns and fossil fuel just don't mix; and solar and wave power are too flaky as yet. But in the short term, watch natural gas opportunities in Southern Africa.

• Sub-Saharan Africa will continue to stumble from political/humanitarian crisis to crisis, in the absense of any united moral leadership by a majority of governments of its major economies. This is not good news for South Africa, but the opportunity to provide that moral leadership and to differentiate this country should not be underestimated. Mr Mbeki's unfolding vision of an African Renaissance is encouraging but needs to be backed by more public hard talking and not a little public arm-twisting.

• We must remember that capital flows are a critical component of our economic health and it is essential that South Africa is perceived by the world at large as a sensible investment destination. Our return on capital invested and its safety must be as good as, or better than, our competitors' (notwithstanding optimistic views on the Rand's current problems), or we will suffer an inexorable down-rating among the nations of the world. Afro-pessimism is out "glass ceiling" and we fail to break it at our peril.

Source: David Clegg, Partner, Tax, 021 410 5500

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