Even though the global economic crisis is back in full swing, the rand adjustment nevertheless remains orderly, John Cairns of Rand Merchant Bank's financial markets research currency division said on Friday.

The USD/ZAR was at R10.80 in Asian trade on Friday morning and looked to pull back to R10.70 in early trade for a 10.65 to 11.00 range, Cairns said.

But the risks of an un-orderly adjustment remain clear, especially as many traders are saying that a break of 10.800/850/875 opens up moves substantially higher, even for 11.60.

"Another day or two of sharp US equity losses and this looks easy — maybe even 13.00. Option volatility seems to be underpricing this risk."

Cairns said, however, that South Africa did have some good news as the government had made it clear that it was looking at foreign financing for the budget deficit and infrastructure programme and to shore up the current account deficit.

Bridging the gap

Eskom's $5-billion loan from the World Bank was the first sign of this and while details were sketchy, he said an initial guess suggested that the government, including Eskom, could raise as much as $10bn over the next two years.

"This would go far in funding the current account deficit, which is running at just under $20bn per annum but is set to decline sharply."

Such offshore financing, however, had to be seen merely as bridging loans. The government should not fund offshore indefinitely to fund the deficit, Cairns said.

In other words, the authorities would have to ensure policy was consistent with an unwinding of the current account deficit.

"This fits well with our view that the ZAR must remain weak and rates must remain high."

Cairns said this would still allow for rate cuts, but not aggressively so.

It was interesting meanwhile to contrast the local response to that in Turkey, where sources said that after extensive negotiations, the International Monetary Fund was ready to provide $20bn to $40bn in financing.

"Both countries have similar problems; inadequate reserves to fully fund a large current account deficit and short-term debt rollover."

Sapa

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