Slowing but resilient global oil demand, non-Opec supply failing dismally to live up to expectations and Saudi wealth maximisation favouring future generations (perhaps?) are pushing oil prices steadily higher.

There is an open bidding war underway, with price discovery possibly reaching out towards $200/b over the next year or two.

If this actually happens, it would do two things.

It could eventually puncture growth prospects in some countries. And it is making central banks uniformly antsy.

This will have further implications.

Instead of precious metals rising gloriously to the occasion, as they did so magnificently in the 1970s, growth puncturing in especially the US, already weakened by credit events, may undermine precious metal prices.

It would suggest an undermining of our current account position, despite king coal keeping pace with sister oil.

A ballooning current account deficit beyond eight percent of GDP would not be good in a world once again stress-tested so soon, this time by oil, after last year's credit binge.

Does it make our rand a sitting duck to get humbled?

Certainly for people focusing on large trade deficits. Not for people focusing on two unlikely heroes wanting to protect us from that fate.

One is a national champion barely out of its teens, and the other is our virtuous central bank.

MTN was only formed in 1994 when cell phones were launched in this country. Yet MTN's market capitalization today is already $40-$50bn. Foreign suitors have been lining up of late. Though nothing final has happened, and may not happen in the end, at least $20bn worth of capital inflow may be on the cards this year if a deal gets consummated. And then there is also Billiton.

Why worry if you have more family silver to flog than a Jane Austen novel?

That would take care of at least a year or more of stressed current account bills. Why worry if you have more family silver to flog than a Jane Austen novel?

But such boodle may not actually be needed, still ending up in private banking balance sheets, if the SARB were to prove rescuer of last resort.

For if oil were to move towards $200, it would puncture more than just US growth. It also would push inflation in emerging markets relentlessly higher.

Most of these countries are balance of payments cash-positive, can afford to raise interest rates in anti-inflation style, in the process inviting appreciation of currencies. This is likely to curtail their inflation.

South Africa is not cash flow-positive, cannot afford to incur too much growth sacrifice for long-term social and political reasons, but is nonetheless bravely standing pat on containing rising inflation expectations.

Thus prime has been pushed to 15 percent and is set to be pushed higher, to 15.5 percent shortly (though apparently no date set as yet) and possibly to 16 percent thereafter.

It isn't only Eskom tariff increases that will be doing the driving. Electricity is now threatening to become a sideshow to the main action, global oil.

As the SARB raises interest rates still higher, it would deepen growth sacrifice, making it widespread. It wouldn't dampen inflation, probably wouldn't entirely contain inflationary expectations either. Wage demands would still rage.

But it should prevent a runaway inflation locomotive. If such action isn't taken, inflation could become reinforced by rand dumping, worsening imported inflation.

We have been here before, many times. The SARB seems heroically prepared to step into the breach and limit the inflation damage, even if it is unable to prevent some.

One will argue that raising interest rates will damage growth, frighten off foreign investors, causing the rand to slide in any case. Perhaps such logic still applies, at least some of the time.

But the reverse may apply more frequently after all. Boosting interest rates, confronting economic ills while reinforcing the carry trade, may support rather than sink the currency.

Oil seems set to puncture whatever national happiness still left us, possibly also sinking the rand in the process. Even so, that last bit may not happen.

Instead, we find foreign suitors at our door in pursuit of our choicest corporate assets. For them to wait for the rand to weaken would be natural, possibly getting an even better price, but the global corporate chase won't allow that luxury.

Route to rand rout

And the SARB in its own right is following a route that should prevent a rand rout.

Whether the rand should be saved is of course another matter. Foreign academics advising the government don't seem to think so.

Instead of $200 oil translating into $2000 gold and a rand worth 5:$, we may get our precious metal prices trampled in the global growth dislocation. This is worthy of a rand nearer 12:$, except that corporate raiders and the SARB may prevent it from happening.

So the rand could uneasily remain marooned in a 7-8:$ cocoon until things change sufficiently. But which way?

Cees Bruggemans is Chief Economist of First National Bank.


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