ECONOMY
Sacob cautions on business confidence
Posted Fri, 08 Apr 2005
A rise in business confidence in March should be viewed cautiously as the weighted exchange rate of the rand fell in the same period, Sacob said on Thursday.
The South African Chamber of Business's business confidence index (BCI) increased by 0.6 points in March to 127.5, up from 126.9 in February.
"A dip in the present high confidence levels may, however, not be serious as long as the rand behaved according to economic rationale," Sacob said in a statement.
Less volatility in the exchange rate was desirable for financial stability, Sacob said.
The depreciation in the rand seen towards the end of March, however, might bring greater "sectoral balance" to business confidence.
On the oil price, "Estimates of double the present crude oil price per barrel... would imply serious strategic positioning (if at all possible) by net oil-consuming economies such as South Africa.
"The present cost of fuel and the multiplier effect it may have on the cost of
doing business will adversely affect business activity and business confidence."
Sacob said although interest rates were rising globally, South Africa had some respite before following the trend to increase rates.
Real domestic interest rates were still relatively high, while the lower limit of the inflation target range was being tested, indicating that inflation targeting was successful — "perhaps too successful", Sacob said.
"In the present climate of surges in real household spending and substantial increases in real government consumption expenditure, a downturn in the business cycle could call for drastic measures to stabilise the expansionary mode.
"Sacob is concerned that extreme action will dent business and investor confidence."
Sacob said the growing current account deficit and the need for capital inflows at least to match the current account deficit was cause for concern.
"As these financial inflows more than cover the deficit, the rand
stands to benefit. Sacob is worried that the nature of the inflows, however, provides a risk that could, in the case of a reversal, render the rand vulnerable with an array of adverse economic consequences to follow."
Sacob said although there were some serious concerns about the international oil price — and as a result business confidence may drift lower in months to come — confidence may nonetheless still reach "comfortable levels" that could promote investor confidence and fixed foreign capital inflows.
Sapa
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