It all feels rather odd. Emerging markets sold off for almost 10 months from late May 2013 on concerns that global liquidity would recede as the US Federal Reserve ends quantitative easing and moves to eventually hike interest rates. Therefore it is surprising that despite comments by Fed governor Janet Yellen two weeks ago that the first rate hike in the US could be as early as April 2015, emerging markets have been doing surprisingly well of late.
The rand was the best performing major currency in the past week – up almost 3% against the US dollar and 2,5% on a trade-weighted basis. The SA currency is up 6,7% from its weakest point on January 30.
Between the beginning of last November and February 5 this year, foreign investors sold a net R40bn of SA bonds and a net R28bn of SA equities.
Since then, the story has changed. R15bn has flowed into the equity market and R17bn into the bond market.
So what has changed? The answer is “not that much”.
Yes, the twin current account and fiscal deficits behind much of the rand’s weakness in the past year look to have passed the worst point.
The fourth quarter 2013 deficit contracted to 5,1% of GDP from a revised 6,4% of GDP in the third quarter. The minister of finance in February produced a solid budget that outlined a plan for fiscal consolidation that is plausible.
I suspect the bulk of the inflows are probably due to global developments. On the positive side, US growth is perking up as the negative impact of the cold weather and the inventory adjustment wear off. On the negative side, the troubles in Ukraine make Russia less attractive and thus SA looks like a better option on a relative basis.
Locally, big question marks remain. The improvement in the current account deficit is set to reverse in the first quarter of 2014. The strike in the platinum sector shows no sign of abating. Workers have now missed nine weeks of pay, but Association of Mineworkers & Construction Union (Amcu) leader Joseph Mathunjwa remains intractable.
There is a chasm between his demands and the current wage levels. While total compensation from the miners may be close to R12500/month – base pay excluding production bonuses, housing and benefits is much lower. The companies cannot meet Amcu’s demands in any reasonable time period without closing down a large chunk of production that would become unprofitable. The stockpiles the three big platinum miners built up prior to the strikes are being depleted. There will be a negative impact on exports and thus the current account deficit in March and April.
The budget deficit looks more secure. Treasury is clearly committed to reining in expenditure and most of the cabinet seems to have got the message. But gravy train excesses are still prevalent. Parliament’s oversight authority recently proposed that taxpayers provide MPs who retire with up to 24 free flights a year for 10 years.
Such moves threaten the viability of the government budget. It is difficult to argue that a policeman whose life is regularly in danger should only get a wage increase of CPI when a politician who served one five-year term in parliament gets free economy-class tickets for 10 years.
While we shouldn’t forget SA’s weaknesses, there are several strengths that are often under-estimated.
Chief among these is a strong private and public balance sheet. Despite running persistent current account deficits, a recent Goldman Sachs research note points out that SA’s net international investment position remains close to zero – South Africans own as much abroad as foreigners do in SA. In this respect, SA looks far stronger than most emerging markets.
The recent strength may be simply a recovery from the overshoot and not that odd after all.
Article from Financial Mail by Nazmeera Moola – 3 April 2014