SA at the mercy of global shifts

Italy ended its longest post-war political stalemate on Friday when its new coalition government was sworn in. Also on Friday, Spain’s conservative prime minister, Mariano Rajoy, was ousted in a vote of no confidence and replaced on Saturday by Socialist Party leader Pedro Sanchez.

On the other side of the Atlantic, President Donald Trump imposed tariffs on steel and aluminium imports from Canada, Mexico and the EU, raising renewed fear of a global trade war. And to cap the wave of market-moving economic news on Friday, US jobs figures came in well above expectations, cutting the US unemployment rate to levels last seen decades ago and adding impetus to the strong dollar.

None of this is particularly good for emerging markets in general, and SA in particular — even though the swearing-in of a new populist government in Italy brought at least some stability to Europe’s third-largest economy. The new government, led by the anti-establishment Five Star Movement and the far-right League, has been described by one political analyst as half political and half technocratic. Financial Times columnist Wolfgang Munchau commented: “The populist government is the logical consequence of 20 years of economic mismanagement by Italy’s centre-left and centre-right political parties.”

It has promised tax cuts and spending increases in terms of which Italy’s fiscal deficit will probably breach EU fiscal rules. While the new leadership seems to have retreated on earlier promises to pull out of Europe’s single currency, its Eurosceptic approach to the EU is in stark contrast to the attitudes of previous governments. While it is not clear yet what that will mean for the Eurozone, or what Spain’s new leadership might mean for stability and policy, the question marks about Europe’s stability and its future remain centre stage.

That is not particularly good for SA. Though Spain and Italy rank far down on the list of SA’s trading partners, the Eurozone as a bloc is SA’s largest trading partner and, even more important, it is by far the largest source of foreign direct investment into SA. Anything that is bad for Europe’s growth and stability is potentially bad for SA. The instability has rattled markets in recent weeks, weighing on emerging markets, including SA.

So too have the questions about Trump’s trade wars. The steel and aluminium tariffs for Canada, Mexico and the EU add a whole new set of tensions to the existing ones between the US and China, given Trump’s threat to extend the tariffs his administration had already imposed on steel and aluminium imports of Chinese goods more generally. SA has already lost the battle to have its steel and aluminium imports exempted from Trump’s move. But it is also affected by the impact on global markets of the trade war threats, which has added to the risk aversion that has put pressure on flows to emerging markets.

But it was Friday’s US jobs numbers that could pose the biggest threat to capital flows to SA and other emerging markets, putting further pressure on the rand exchange rate and on bond yields. The strong jobs numbers indicate a strong US economy, and that will provide fresh support for the US Federal Reserve’s interest rate hiking cycle — the Fed is widely expected to raise rates again at its June meeting. But the question now is whether markets should expect four more US rate hikes in 2018, rather than the three the market had been pricing in. The rand has been depreciating against the dollar and a stronger dollar and higher US interest rates could cause it to head for the R13 level.

As it is, the latest data on SA suggests the “Ramaphoria” is levelling off and the real economy remains weak, with Friday’s purchasing managers index falling below the key 50% level again, reflecting weaker conditions in manufacturing.

The bottom line, simply, is that SA needs to move faster to put growth-boosting economic reforms in place that will make it less vulnerable to the swings and arrows of outrageous fortune in global markets.

NONE OF THIS IS PARTICULARLY GOOD FOR EMERGING MARKETS IN GENERAL