Economic Watch

South Africa needs economic ‘war room’ for uncharted waters

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With the world economy having entered uncharted waters, which has turned economic analysis into mostly a guessing game, cool, calculating heads and flexibility are called for.

While most attention in recent times has been focused on China and what is happening to its currency, the yuan, it mostly gets forgotten that the strength of the US dollar is as big a problem to the global economy. In fact, that is probably one of the reasons for the devaluation of the yuan as Chinese authorities, for a number of reasons, are aiming at decoupling their currency from the dollar.

One of the few certainties in a global economy where uncertainty has become the only real certainty, is that especially emerging countries – including South Africa – are set for an extended period of currency and economic volatility. And it is especially the case for countries, like South Africa, that are heavily dependent on commodity exports.

If one reads only domestic commentary and analysis you would think that South Africa suffers from a uniquely, homemade, extremely negative economic situation. Fact is, however, that this country finds itself in the company of an extended group of nations.

For instance, the SA rand is but part of a global trend that has seen emerging market currencies sink to a 15-year low, with their equity markets in bear territory. The global MSCI Emerging Market Index is down just a shade less than 20% since April. (This index is maintained by MSCI Inc, formerly Morgan Stanley Capital International, tracking 1 631 global stocks.)

South African equity markets, according to the MSCI index, was down by 8.8% in dollar, terms compared to Greece at the bottom, out of 25 countries listed, at 48.3%. But for perspective it should be noted that South Africa was in the ninth position out of 25 countries listed, with only five in positive territory and Brazil by comparison in the 23rd position at 28.1% down.

On the currency front even the Australian dollar, often regarded as a proxy for the yuan, last week fell to a six-year low and key industrial commodities –  from nickel, copper and iron ore to aluminium – took a knock, putting further pressure on employment in emerging export countries.

The Chinese factor

About one thing there seems to be consensus among analysts, whichever way China plays the management of the yuan, emerging markets are going to feel the negative fallout.

The broader context for the Chinese is that they have started with a restructuring of their economy, from production-based growth to a consumption/export base requiring a more competitive position for its exporters. In that context its coupling to the presently strong dollar is a negative – for one, because the US is a vital export market for them and, secondly, because most other markets buy with dollar-coupled currencies.

At the same time China is attempting to lay the groundwork for a more open financial system, but trying to avoid a capital flight from the country.

The Chinese, since earlier this year, have been in talks with the International Monetary Fund (IMF) about making the yuan part of its special drawing rights (SDR) basket – a decision expected by the end of this year or the first quarter of next year. The IMF welcomed the recent devaluation of the yuan, saying “China can, and should, aim to achieve an effectively floating exchange rate system within two to three years.”

American factor

What has been happening also has a strong influence on what is, or will be, happening in the trade between the US and China. The yuan’s value has increased considerably against the US dollar in recent years and although talk of a “currency war” is probably a tad over the top, the world’s largest economies are involved in some serious arm-wrestling.

Some commentators, like Peter Schiff, CEO of Euro Pacific Capital and bestselling author of Crash Proof, believe that the dollar, which has been strengthening for some time, is in a bubble that could burst.

That leaves the US Federal Reserve in a quandary regarding plans to lift interest rates towards the end of this year, something that will not only again put pressure on emerging economies, but could also damage the US consumer-based economy. Some analysts estimated that a rate hike could cost highly indebted US consumers as much as US$9 billion per year.

Implications

Heinrich Kruger, CEO of Kruger International Asset and Wealth Management, in an interview with The Intelligence Bulletin, said the world economy is experiencing a situation never seen before. There are no historical precedents on which economists can base analyses or predictions.

This makes not only for high volatility in markets, which is likely to last for quite a while, but also for mostly guesswork, rather than sound analysis on which to base long-term commitments.

As Forbes reported last week: “Most analysts in a Bloomberg survey are looking for further declines in most of the emerging markets through the middle of next year. One well-known analyst thinks many could lose another 30-50% but maybe bearish sentiment is getting too high.

“For those involved in the equity markets, in the world where money has in many respects become just another commodity with a ‘price’ attached to, there might be money to be made, or lost, in the field of speculation.”

For the serious investor in stock markets the best advice is probably to stay calm. Though one cannot ignore the impact of global developments, they should be viewed in the context of long-term trends and it would probably be best to sit out the present storm.

Implications for South Africa

In the light of the likely extended period of volatility that lies ahead for emerging markets and particularly for South Africa with its high reliance on commodity exports, the present high levels of discord between business and government and high levels of policy and legislative uncertainty are particularly bad news.

While it is a time for cool heads, calculated moves to adapt and restructure, to deal effectively with changing global realities, which are placing the viability of key sectors of the country’s economy under pressure:

  • New BEE codes are introduced, which increases the cost of doing business in the country, while doing very little to improve the lot of ordinary people or create new job opportunities;
  • A wave of coal and gold mining sector strikes are looming;
  • Electricity costs seem set to jump by a further 25%;
  • Key political players, from President Jacob Zuma down, are at loggerhead with the mining and some industrial sector leaders over restructuring plans implying large job losses;
  • Regulatory and policy moves by some departments, like Home Affairs in the case of new visa regulations, are crippling sectors which can and should help to diversify the South African economy;
  • While organised labour is fracturing, one section continues to wield disproportionate influence on government and its policies;
  • The high compliance cost of labour law is estimated to make a considerable contribution to keep 8.7 million South Africans unemployed; and
  • Government seems poised to, to a large extent, copy the Chinese development model at a time when China is discovering that it has to move towards a more market-aligned dispensation.

There can be added to this list, but it is clear that for the South African economy to survive and avoid social unrest, the country needs to get its act together and focus across socio- and political-economic sectors. Maybe the time has come to pull representatives from the leadership of these sectors together in an ‘economic war room’ or properly empower the forums, like the National Economic Development and Labour Council (NEDLAC), that already exist.

by Piet Coetzer

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