SA has window of opportunity
There is a chance for us to get our house in order
THE apparent disconnect between recent gains by the rand and the release of depressingly poor consumer and business confidence indicators should not come as a surprise, as economic fundamentals remain largely unchanged and the increase in foreign capital flows and subsequent strengthening of the rand is almost entirely a result of external factors.
According to an index released by the Bureau for Economic Research last week, consumer confidence fell to minus seven points from minus three in the fourth quarter of last year. Even more worrying was the business confidence index released by the South African Chamber of Commerce and Industry, which fell to 90.4 last month from 93 in February, the weakest it has been since April 2000.
At the same time, the rand has experienced a significant recovery, having gained about 3% since early this month. Of course the key driver behind the move was the announcement by the Bank of Japan of its intention to embark on an aggressive quantitative easing programme that would see the bank inject $1.4-trillion into the economy in less than two years.
In the bond market, foreigners were net purchasers of R1.295bn of local bonds on Wednesday and another R217.858m, including repo transactions, on Thursday. So far this year, foreigners have been net buyers of R24.346bn of local bonds‚ excluding repo transactions. Even the trade deficit seemed to improve, having narrowed to R9.52bn in February from a record deficit of R24.5bn in January.
These movements have eased pressure on the current account deficit, which has been one of the driving factors behind the rand’s weakness. The fact is that the improvements we have experienced have little if anything to do with improvement in the domestic economy or SA being a particularly attractive investment destination. The rand has strengthened as part of a group of high-yielding currencies, not because we are a uniquely good investment destination.
The improvement in the trade deficit was mainly owing to a 17% increase in exports and a 7.7% decrease in imports; however, the slowdown in imports was largely driven by a fall in domestic consumer demand.
Rising inventories as a result of falling demand has meant that shops have little need to purchase new stock, which is hardly a positive situation.
Moreover, business and consumer confidence are lagging indicators that retroactively reflect the business and consumer outlook. It is unlikely we will see a marked improvement when figures reflecting present circumstances are released. Local data releases continue to be disappointing, with the most recent manufacturing production figures falling 3.1% month on month and 2.9% year on year‚ after a 3.7% year-on-year increase in Jan- uary. To add to our woes, commodities have experienced a significant sell-off, with gold — one of SA’s key generators of foreign currency — having dropped more than 4% on Friday to its lowest since July 2011. The precious metal is now about 22% below the record it hit in September 2011 of $1,920.30/oz.
Silver, platinum and iron ore prices have also plummeted over the past weeks, placing additional pressure on the mining sector.
The strong rand provides a measure of protection from inflation and the worst effects of the current account deficit, but as soon as the US starts producing better data and shows definite signs of recovery, markets will respond in anticipation of a cutback in loose monetary policy and begin withdrawing higherrisk and high-yielding investments in emerging market currencies.
In the same vein, while depressed European markets mean demand from our biggest trading partner remains damped, we are to a large extent protected from the consequences of poor domestic policy the longer that the European crisis continues.
‘It would be prudent for the government to get going as soon as possible on the planned large-scale infrastructure projects’
In this context, it becomes apparent that the South African economy remains vulnerable to sudden changes in global sentiment, and the government should act quickly to make the most of the dual benefit of a relatively stronger currency and low interest rates.
Given the measure of relief that present circumstance has given the current account, it would be prudent for the government to get going as soon as possible on the planned large-scale infrastructure projects.
The large capital requirements of these projects, as well as the effect on the trade deficit, will be significantly assisted by lower borrowing rates and a stronger currency. Most important, the sooner these projects are started, the sooner the effects of stimulus of the domestic economy in job creation and increased demand will be felt.
The biggest risk would be for the government to become complacent in the face of this predominantly externally driven improvement in circumstance. The surge in liquidity from the Bank of Japan and the assurance that the US Federal Reserve will continue with its quantitative easing for longer than expected is a lifeline we cannot afford not to grasp with both hands and should be viewed as an opportunity to get our house in order.
When the global economy starts to recover, we cannot — nor will we be able to — rely on our position as benefactors of a global search for yields to keep the economy afloat.