Breaking rules breaks emerging markets
Emerging-market currencies have been caught up in the political and now financial crisis confronting the Turkish economy and its leader.
Alas, the rand has been one of the worst performers, especially on Wednesday. It is a trend that continued on Thursday morning.
The Turkish lira has regained some ground against the still strong dollar and significantly more against the weaker rand.
At its worst this month, on August 13, the lira had fallen from $4.99 to $6.88, a decline of 37%. That same day, the rand was about 9% weaker against the dollar compared to August 1, and so 21% up on the lira.
As I write mid-morning on August 16, the lira is now stronger than it was at $5.81 and the rand has weakened to $14.511. The local currency has now lost about 4.6% of its beginning-of-August dollar value. This is not good news for the SA economy. It means more inflation and less spending power for hard-pressed households and firms.
The Turkish and SA economies have something in common: dependence on foreign capital to fund expenditure. The Turkish economy has experienced a boom (more than 7% real GDP growth in 2017) led by rapidly rising private-sector capital expenditure (capex) funded increasingly with short-term borrowed dollars.
This growth has been accompanied by rapidly rising inflation and a widening ratio of current-account deficit, and so capital inflows, to GDP.
Interest rates have lagged well behind inflation, now running at about 16% a year.
The contrast with a depressed SA economy could not be greater. Our privatesector capex cycle is even more depressed than household spending. Inflation (especially at retail level) remains well below interest rates and the currentaccount deficit has stabilised at about 3.5% of GDP. The borrowing SA does is mostly by the government and its agencies and is predominantly undertaken in rands.
Foreign lenders, rather than local borrowers, are exposed to the risk of the rand weakening, from which they collect a wide risk spread of the order of 6% a year more than dollar yields.
SA business savings — cash retained — runs at about the same rate as stagnant or declining capex. Our fiscal deficits and the ratio of government debt to GDP are wider than those of Turkey, and may be getting wider, according to Moody’s on Thursday.
This is not an opinion that is helpful to the rand, or the cost of borrowing dollars for five years. That is currently running at 2.17% above US five-year yields.
Turkish debt in dollars is offering an extra 4.88% a year for five years, even more junky than SA debt.
So what went wrong with the Turkish economy?
It is the result of a serious disagreement with the US about the arrest of an American pastor, possibly imprisoned as a bargaining chip for President Recep Tayyip Erdogan’s public enemy number one, Fethullah Gulen, who lives in the US. His followers are accused of fomenting a coup, and many thousands of them are in jail.
This clearly indicates that countries that depend on foreign capital need to play by the (American-inspired or enforced) rules that govern international trade and flows of capital and legal practice.
This surely applies also to SA. By proclaiming the ANC’s intention to expropriate farming land without compensation — definitely against “the rules” — and given the turmoil in the markets, ANC chairman Gwede Mantashe did SA and its growth prospects enormous harm.
As mineral resources minister, he could, however, immediately undo the damage by signalling changes to the mining charter that will make mining in SA investor and owner friendly.
Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.