Dennis Dykes: Senior Economist, Nedcor

MONEYWEB, BY BRUCE WHITFIELD, 18 DECEMBER 2001

BROADCAST TRANSCRIPT: On to Dennis Dykes now, who’s senior economist at Nedcor. And the latest bit of bad news that has hit us, really, I suppose – and it’s hardly likely to light up our Reserve Bank governor’s face – is the fact that after several years of successfully fighting inflation, it seems to be getting the better of him. Tito Mboweni has made fighting inflation his primary task. He’s always said that he plans to get to between 3% and 6% inflation in the next year, In 2002. Today we saw CPIX at 6.3%, up from 5.9% the last time round. Dennis, just how serious are today’s numbers?

DENNIS DYKES: Not too bad. The consensus forecast had been for around about a 6.2% increase, and I think one of the key features was there was a very low base last year. The same period last year only rose 0.1% in November 2000. So it was really very much expected that it would rise above 6%. I think what’s disturbing in the numbers, though, is that food inflation has been rising quite strongly, and that we haven’t yet seen the effect of the rand’s depreciation come through.

MONEYWEB: Other economists on this programme have said in the last couple of weeks that, regardless of what action the Reserve Bank takes in the next couple of months, Tito Mboweni’s targets are going to be missed. There is no way in which he can make that 3% to 6% target range. Do you agree with that, or is there still room for him to move?

DENNIS DYKES: I do agree in one sense, and that is if you raise interest rates now it would really be to try and achieve your 2003 target, rather than your 2002 target, because typically interest rate rises take something like 18 months to 24 months to have some sort of effect on inflation. So in that sense I agree. I think there is a possibility. It very much depends on what happens to the rand, obviously, between now and the middle of next year for him to make the target still. If we see a consolidation and maybe a slight pull-back in the rand – which I have to admit doesn’t look very likely at the moment – but if that happens then I think he’ll still make the target. If, however, we continue to see this continual drain on the currency then clearly he’s going to miss the target.

MONEYWEB: What levels does the rand need to strengthen to in the next six months for Tito Mboweni to meet that 3% to 6% target next year?

DENNIS DYKES: Well, I think the key is that it starts consolidating at around about the R12/$1 level and maybe pulls back into the lower R11s. that would make it still difficult for him, but nevertheless achievable. What’s helping him at the moment is that international prices are actually quite depressed. You know, if you look at things like oil prices, they’ve come off quite substantially. A lot of our imported prices are actually falling in dollar terms, so that’s actually offsetting some of the rand depreciation. Obviously not all of it. And it’s quite amazing, if you look at certain of our imported components in the CPI, they really have not shown any tendency to rise, despite the big depreciation we’ve seen already – if one thinks of appliance prices, even new vehicle prices, which we know are going to go up early next year. But so far they’ve actually held back quite well.

MONEYWEB: Global inflation is declining. We’ve seen it in other economies. Ours is showing signs of uneasiness. Put it that way. There’s got to be a significant problem here if the rest of the world’s inflation is declining, ours is showing signs of going up. Should we be worried?

DENNIS DYKES: Well, the main concern, obviously, is the currency. The currency has fallen by 35% over the last year, which means that import prices, other things being equal, would have risen by around about 50% or so. So it’s just been a tremendous strain. The only other area where we’ve seen some sort of upward tendency to inflation is food inflation, and that’s linked to very wet weather that we’ve seen over the last little while and in no small part, as well, to the rand’s demise.

MONEYWEB: You must be sick, I’m sure, of talking about the rand. I think every person and their dog must be asking you what is happening – give us reasons for it. We pretty much know the reasons. The fact that it’s illiquid. The fact that there are currency traders who are taking advantage of that illiquidity and they are able to drive our currency down. Arthur Buchner, earlier on in the programme, from BoE, described the rand’s weakness as a thief sitting on the outside and if nobody’s going to stop the thief he’ll continue stealing. It sounds quite dramatic, but perhaps not entirely inaccurate.

DENNIS DYKES: It’s not a bad analogy. You know all the reasons that are given for the rand’s fall – Argentina, Zimbabwe, etc, etc, are valid reasons in themselves, but should not really have led to such a significant fall in the currency. If you look at the year as a whole, South Africa has performed practically the worst out of any emerging market currency. Most emerging market currencies are pulling back against the dollar at the moment. So there is something really quite unusual going on here, and I think the analogy that was given to you is not misplaced. Certainly there are some international traders who’ve had a very profitable relationship with the rand, and they obviously are locked in a battle with the Reserve Bank to show their that their recent tightening of controls will not work.

MONEYWEB: The other thing about the rand, I suppose, is the fact that it does seem to be in crisis. But do you buy the argument that the currency is undervalued, that our fundamentals are strong? Or is the market telling us that perhaps we’re not quite as well off as we thought we were?

DENNIS DYKES: If you look at any fundamental – and it’s not just South African economists that say it, is it? – it’s also international credit rating agencies and outside economists who look at these factors. You can’t make out a strong case that the rand is overvalued, and most would say significantly undervalued. So that, I think, is why people are looking for other reasons to explain the big drive down. And unfortunately you then have to come to most sinister sort of motives for people driving it down.

MONEYWEB: Dennis Dykes, senior economist at Nedcor.

Posted in Market commentary

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