Emerg­ing mar­kets, where the only con­stant is change...

Finweek English Edition - - Opinion - By Tu­misho Grater ed­i­to­rial@fin­week.co.za Tu­misho Grater is an eco­nomic strate­gist at No­vare Ac­tu­ar­ies and Con­sul­tants.

mThis has been a tur­bu­lent year for South Africa. But the coun­try is not alone.

ost of us are fa­mil­iar with the ex­pres­sion “a change is as good as a hol­i­day”, but con­sid­er­ing the plethora of de­vel­op­ments in South Africa over the past few months one might be tempted to dis­agree. In fact, they have pos­si­bly had quite the op­po­site ef­fect. SA en­dured numer­ous changes in the first half of 2017 and, re­gret­tably, they haven’t al­ways been for the bet­ter. Much of the pos­i­tiv­ity and hope held by in­vestors (and South Africans) in the be­gin­ning of the year has with­ered.

2017 held the prom­ise of im­proved eco­nomic growth, and a de­crease in the bulging un­em­ploy­ment rate. In­stead, the first half of the year saw mul­ti­ple down­grades, a still-strug­gling econ­omy and a col­lapse in busi­ness con­fi­dence (now at the weak­est level since the 2009 re­ces­sion). In ad­di­tion, the ever-chang­ing po­lit­i­cal set­ting cre­ated much un­cer­tainty, catal­ysed by ques­tion­able changes in lead­er­ship.

And reg­u­la­tory changes have raised ques­tions about po­lit­i­cal and eco­nomic pol­icy.

Some­thing to con­sider is why do­mes­tic fi­nan­cial as­sets barely re­acted to this del­uge of bad news de­spite soft­en­ing com­mod­ity prices in re­cent months. The an­swer, un­for­tu­nately, lies not in lo­cal progress but rather in the sup­port the coun­try has re­ceived from ex­ter­nal fac­tors.

Even though the US Fed­eral Re­serve has been tight­en­ing mone­tary pol­icy, the cen­tral bank is still be­hind the curve, which has buoyed for­eign ap­petite for high-yield­ing emerg­ing-mar­ket as­sets (such as the rand and South African bonds). This, cou­pled with US Pres­i­dent Don­ald Trump’s prom­ises on fis­cal stim­u­lus – which he has been slow to ex­e­cute – has kept the dol­lar weaker and pro­vided emerg­ing mar­kets with an en­vi­ron­ment in which to thrive. It is im­por­tant to re­mem­ber that this sup­port­ive mar­ket back­drop is un­likely to last and may ex­pose SA’s al­ready-frag­ile econ­omy to fac­tors such as the slow­down in China’s cycli­cal hous­ing mar­ket, which will trans­late into weaker com­mod­ity prices.

Ex­ter­nal fac­tors aside, hope springs eter­nal that a change in lead­er­ship (ei­ther through the im­peach­ment of Pres­i­dent Ja­cob Zuma or na­tional elec­tions), will re­verse the eco­nomic un­der­per­for­mance of the past sev­eral years. The sce­nario of im­proved fu­ture eco­nomic gov­er­nance has, to some ex­tent, also been priced in by in­vestors.

Emerg­ing mar­kets, no mat­ter how sim­i­lar, can­not be painted with the same brush. That said, there is value in draw­ing com­par­isons be­tween coun­tries that pos­sess sim­i­lar char­ac­ter­is­tics. Let’s take the ex­am­ple of the “Frag­ile Five” economies, con­sist­ing of Turkey, Brazil, In­dia, SA and In­done­sia. (The term “Frag­ile Five” was coined by a Mor­gan Stan­ley an­a­lyst in 2013 to rep­re­sent emerg­ing-mar­ket economies that had be­come too de­pen­dent on for­eign in­vest­ment to fi­nance their growth.)

Apart from their vulnerability to tight­en­ing in global credit (and in par­tic­u­lar Fed tight­en­ing), an­other shared fea­ture was that all five coun­tries ran large cur­rent ac­count deficits. There­fore, the group­ing can as­sist in il­lus­trat­ing how changes in lead­er­ship lead to changes in pol­icy and as a re­sult split the coun­tries into two dif­fer­ent cat­e­gories (with the ex­cep­tion of Turkey).

The strong­est re­form mo­men­tum has taken place in In­dia and In­done­sia, and th­ese economies are pro­gress­ing well. In In­done­sia, the gov­ern­ment has al­ready started to im­ple­ment re­forms to im­prove the in­vest­ment cli­mate and lift growth. Th­ese in­clude ex­pand­ing in­vest­ment in public in­fra­struc­ture, re­duc­ing the lay­ers of gov­ern­ment reg­u­la­tions and free­ing up new ar­eas of the econ­omy to pri­vate in­vest­ment. The gov­ern­ment’s strat­egy to strengthen tax col­lec­tion and broaden the tax base through tax re­form is also likely to gen­er­ate ad­di­tional rev­enues to pay for pri­or­ity gov­ern­ment in­vest­ment.

Brazil and SA’s slow (and some­times ab­sent) re­form agen­das have placed the two coun­tries in a dif­fer­ent po­si­tion. Fol­low­ing the im­peach­ment of for­mer Brazil­ian Pres­i­dent Dilma Rouss­eff last year, hopes of po­lit­i­cal change as­sisted in lift­ing the eq­uity mar­ket and el­e­vated op­ti­mism that the coun­try would be lifted out of its worst re­ces­sion since the 1930s. The an­tic­i­pa­tion and hope for trans­for­ma­tion ob­served in Brazil is sim­i­lar to what South Africans are ex­pe­ri­enc­ing to­day. One could ar­gue that the ex­am­ple is too sim­plis­tic and ig­nores some of the fun­da­men­tal so­cial, po­lit­i­cal and eco­nomic dif­fer­ences be­tween each coun­try. This would be a fair point; how­ever, the key theme of how lead­er­ship and a com­mit­ment to re­form can change the for­tunes of a coun­try is a les­son that can be drawn here.

Most emerg­ing mar­kets con­tinue to move in a pos­i­tive di­rec­tion with re­spect to pol­i­tics, but au­to­crats, pseu­do­d­ic­ta­tors and cor­rup­tion are in­gre­di­ents that make th­ese economies chal­leng­ing to anal­yse. Re­cent events in Brazil (where Pres­i­dent Michel Te­mer was charged with ac­cept­ing bribes) showed just how unpredictable po­lit­i­cally driven out­per­for­mance is and that it can re­verse quickly and sharply. Pol­i­tics is com­pli­cated and po­lit­i­cal risk is not unique to SA. This holds true for many other emerg­ing mar­kets. Elec­tions and other po­lit­i­cal events, eco­nomic crises, and chang­ing so­ci­etal at­ti­tudes can dis­rupt the best­laid plans in both emerg­ing and ad­vanced economies. ■

The ever-chang­ing po­lit­i­cal set­ting cre­ated much un­cer­tainty, catal­ysed by ques­tion­able changes in lead­er­ship.

Dilma Rouss­eff For­mer pres­i­dent of Brazil

Ja­cob Zuma Pres­i­dent of South Africa

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