September 14, 2011

State swells ranks as job losses grow

By *media update*

Almost 50000 people joined South Africa’s growing ranks of the unemployed in the first six months of this year, as the embattled economy continued to bleed jobs in critical sectors like mining and manufacturing Adcorp reported yesterday.

But while employment in the private sector shrunk, government employment swelled by 6.2% in the same period.

“The public sector now accounts for all the job creation in the economy for 2011 as a whole,” says Adcorp labour market analyst Loane Sharp, adding that last month’s employment decline was sharpest in the manufacturing (19.9%), mining (19.3%) and construction (16%) sectors.

One glimmer of hope comes from the unofficial sector, which continued to create jobs, says Sharp.

In August the sector employed 16 917 additional people, enhancing the “informalisation” of the country’s workforce,” he says.

But the harsh reality is that each job lost by a breadwinner has a devastating knock-on effect on the people who depend on them, says Brait chief economist Colen Garrow.

“It is deeply hurting every time people lose their jobs because one lay-off may affect five to eight family members,” said

“For poor families the result of a lost job by a breadwinner will even derail the education of the young ones. Without any doubt, the deteriorating of job losses situation will push a number of families into deep poverty, added Garrow.

The continuing haemorrhaging of jobs in the SA economy is highlighted in the August Adcorp Employment Index.

It reveals that the mining, manufacturing and construction sectors, all key drivers of the economy, shed jobs at double-digit rates, leading to calls by economists for urgent corrective action.

The authoritative reports blame the crowding by government of private sector participation in the economy as one reason for SA’s dismal employment picture.

The loss of 50000 jobs within six months is seen as a catastrophe by economic observers, especially as it comes on top of the more than 1 million jobs already lost during the ongoing financial crisis.

The Adcorp index overall employment declined by 2.1% in August, the fourth consecutive monthly decline.

It warns that employment conditions remain “exceedingly weak”, suggesting that the prospect of an improvement in permanent jobs was a long way off.

Garrow said it was difficult to see how government could reach its ambitious target of creating 5million jobs by 2020.

While the New Growth Path (NGP) targeted unskilled and semiskilled workers, the sectors it targeted were precisely the ones that were shedding jobs, notably manufacturing and mining.

“It’s abundantly clear that for the economy to grow at a more respectable pace, a drastic rethink is required on the labour market,” he said.

“Scrapping the minimum wage to get more people actively involved in the economy, is a start and long overdue.”

Econometrix chief economist, Tony Twine, said that both the manufacturing and mining sectors had been through turbulent and uncertain times.

It was not surprising they were not rushing out to hire people and expanding their workforce, he said.

“We are faced with the paradox that these sectors have been identified to absorb labour, just at the time when their employment levels are falling.”

But, Chris Hart, Investment Solutions chief economist, argued that the main reason for the lack of job creation was that labour laws were too hostile to small business and “very obstructive” to creating jobs.

“One of the biggest problems is that there is too much policy uncertainty, particularly in the mining and agricultural sectors – something which investors shy away from.

“The solution for this problem is simple. The government must aim at creating 20 million jobs in five years, instead of the projected 5 million jobs in the next 10 years,” Hart said.

Article courtesy of The New Age – for the original article, please click here

Leave a comment | posted in economic growth, household, private sector, unemployment

September 13, 2011

Pushing up VAT ‘the least damaging way to fund NHI’

By *media update*

(this article got quite a few comments – please click here to link directly to the Mail & Guardian website to read the original article…)

An increase in Value Added Tax (VAT) would go a long way in helping to meet the government’s goal of funding an effective National Health Insurance (NHI) within 14 years, experts say. 

Several economists who spoke to the Mail & Guardian on Monday feel that raising the tax on all purchased goods would be the most effective way of financing the NHI.

“It is the least damaging way of funding the NHI as our income and company tax is already too high,” says Dawie Roodt, chief economist at the Efficient Group.

These thoughts are echoed by Stanlib chief economist Kevin Lings, who feels the cost burden of a comprehensive health scheme should be borne by the whole population.

“There is no doubt that the government needs to increase its coffers to pay for this and it’s not an unreasonable suggestion, seeing as though all will benefit from NHI — this way everyone will pay,” Lings says.

Consumption drives consumption
Chris Hart, chief economist at Investment Solutions, says the cost of NHI would be significantly offset by raising VAT: it would tie funding to the nation’s ability to spend.

“VAT is driven by consumption, which is exactly what the NHI is. The costs can be offset to a certain extent within the consumptive chain,” Hart tells the M&G.

The comments follow a report in the Times on Monday that the treasury’s is apparently warming to the idea of an increase in VAT.

The department’s chief director of economic tax analysis and tax policy, Cecil Morden is quoted as saying that “a higher VAT rate could be justified on efficiency grounds” and that at 14%, South Africa’s VAT rate is “relatively low when compared to the worldwide average of 16.4%”.

This is the first sign that government is seriously considering the idea of a higher VAT rate. Finance Minister Pravin Gordhan has so far remained mum as to how the scheme will be funded.

It is expected that NHI could cost in the region of R125-billion in 2012 and R214-billion by 2020, according to a government’s green policy paper on the issue released in August.

Based on recent financial data, this would equate to 6% of the country’s Gross Domestic Product (GDP) in 2012.

An NHI pilot project is expected to be launched across the country in 2012, following the conclusion of an audit currently being undertaken at the country’s about 4 200 health facilities. If VAT were to be increased, it would be the first time the tax has risen since 1993 after it was first introduced in 1990, at a rate of 10%, as a substitute to General Sales Tax (GST).

Don’t target the poor
The Congress of South African Trade Unions (Cosatu) is strongly against the idea of raising VAT, as this would put those who are most economically vulnerable at risk.

“It’s something we will continue to have an issue with. The NHI aims at accessibility and affordability but if you rely on VAT, it defeats the purpose by placing pressure on those with the least money. Those who are supposed to benefit will suffer the most,” Cosatu president Sdumo Dlamini tells the M&G.

Dlamini believes that although the NHI has become a non-negotiable goal for government, its cost must never “fall on the shoulders of the poor”.

Hart counters this argument with a suggestion that VAT should only be increased substantially on luxury or non-essential items.

“I don’t see anybody who buys a flat-screen TV having a problem with a portion of the VAT included on the item being increased to fund NHI — so the poor won’t be affected,” Hart says.

Article courtesy of Mail & Guardian – please click here to see original article

 

Leave a comment | posted in development, economic growth, fiscal policy, media update, taxation

September 13, 2011

Can Obama save US from double dip?

By *media update*

A quick economic rescue is not likely in the US says Investment Solutions chief economist Chris Hart, the US president paying mostly lip service to voters and business

The US has announced a $447billion jobs plan that’s going to involve tax cuts for workers and small businesses, but the end effect is unlikely to pull America out of a second recession.

That’s the view of Investment Analyst, Chris Hart, speaking on Summit TV.

“There are tax cuts for small businesses,” said Mr Hart, “but there aren’t regulatory cuts.”

They don’t want to cut down the protection Americans have enjoyed for a long time, adding that the number of rules and regulations which now dominate American business is seriously affecting growth.

“It goes from the sublime to the ridiculous where they regulate almost everything down to the size of a loaf of bread,” he said, “so there can’t be that much relief with R40billion in compliance costs.”

Mr Hart said that an enormous amount of money was being spent on compliance by companies, people effectively working for the government rather than the other way around.

“There’s a lot of detail that’s missing in Mr Obama’s plan,” said Mr Hart.

Issues the Obama government is grappling with is how to help home owners across the US, and prevent teachers getting laid off with the budget cuts.

“The plan looks to be reasonably uncontentious – in other words there is something in it for everyone, and a nice big fat compromise that in itself is often a sub-optimal solution anyway.”

Mr Hart felt that the plan would be passed at some stage, but in a different form.

“There is going to have to be some grand-standing and there could be some improvements – but there is going to be a little bit of robbing Peter to pay Paul because it has to be neutral on the budget where spending here is going to have to be taken away from somewhere else.

Mr Hart felt that what was going to be cut could be contentious, but also said that spending by Washington to create jobs and prosperity was a misnomer.

“Government spending typically has a much lower multiplier than investment spending by business – when governments spend money that reduces the amount of money that’s then available in the investment sector of the economy.”

Mr Hart said the unintended consequences of government spending were not often appreciated.

Leave a comment | posted in 1st world, economic growth, taxation, unemployment

August 30, 2011

Global crisis, strikes impede SA economy

By *media update*

This week, a major highlight of the local economic calendar would be the release by Statistics South Africa of the GDP data for the second quarter of 2011, where slower growth was expected, Brait economist Colin Garrow said.

He said while the jury might be out on the extent to which the economy slowed from the previous quarter, there was broad consensus that its momentum slowed drastically from the 4.8% it grew by in the first three months of the year.

He said reasons for the slowdown were abundant, considering the fact that supply sectors were under pressure, battling to cope not only with the strength of the rand was having on their export activities, but also with the impact of global market volatility.

“The source of problems arises not only from the soft patch in the US economy, which many believe is being tipped into a double-dip recession, but also from the crisis continuing in the euro zone.

“Trade with this bloc remains one of the most significant for South Africa. The euro accounts for the largest weighting in the SA Reserve Bank’s trade-weighted index, a basket of 15 currencies. What affects Europe, will inevitably affect South Africa,” Garrow said.

Using the Purchasing Managers Index (PMI) as a proxy for the manufacturing sector, Garrow said some disappointment in the value-added contribution to domestic output in Q2, would not be unreasonable.

However, said Garrow, the PMI had fallen for four straight months in a row and most recently to 44.2 in July, which was affected by numerous strike activities.

“In an environment in which GDP growth is slowing, the benefit of the credit multiplier isn’t fully exploited. Annual growth in credit extended to the private sector remains lethargic, with data for July expected to be little changed from the previous month, around 5.2%.

“Among its components, the largest, mortgage advances, is expected to remain near-static from the previous month. This reflects a number of economic concerns – the poor state of the labour market, weak consumer confidence, adjustments that have arisen from a number of more expensive administered prices, high levels of household debt, and a preference for consumers to postpone consumption in favour of winding down debt,” he said.

Chris Hart, chief economist at Investment Solution, predicted growth to be just under 2%. He also attributed the reason for slower growth to the current global economic crisis and a huge number of strikes locally.

“It is very difficult for one to start to predict when growth will start picking up again because the environment is currently hostile,” Hart said.

Article courtesy of The New Age – Please click here to see original article

Leave a comment | posted in economic growth, eurozone, inflation, labour, trade

August 28, 2011

Officials stir up hornet’s nest at Transnet

By *media update*

Proposals by Department of Transport officials to the National Planning Commission on private-sector participation in Transnet have sparked a heated debate over the parastatal’s future.

The uncoupling of Transnet’s Freight Rail division was rejected by CE Brian Molefe, but was backed by the United Transport and Allied Trade Unions (Utatu).

Molefe pointed to the failure of similar international models. He said international experience was replete with examples of separating operations from the network’s management and the infrastructure not producing the desired outcomes.

Molefe said capital investment was needed to restore the proper functioning of the freight-rail business after two decades of under-investment.

“Yes, the role of the private sector needs to be debated, but we need to ensure that we invest and maintain the infrastructure. Transnet is already engaged in fundraising initiatives,” he said.

Utatu general secretary Steve Harris said: “You can’t take infrastructure away from the company. The problem lies with the government. This government and the previous are liable for their failure to invest in infrastructure. You can’t keep on maintaining,” he said.

Harris said Transnet’s problem was 30 years of not investing and training people. There used to be 3000 to 4000 technical trainees; now there were about 500.

“This is not about the fear of the job losses that we trade unionists are always branded with, but it’s a clear and simple call of solving the problem through investment and training. Transnet is about to do that,” he said.

Chris Hart, an economist at Investment Solutions, said: “Yes, the problem has been under-capitalisation. But the point is the current model is a failure.

“Opening it up to new investors could solve the problem of under-capitalisation. Yes, it will need an investor with deep pockets to participate, but with a good and attractive project, surely investors will be there.”

Article courtesy of businesslive.co.za. Please click here to see the original article

Leave a comment | posted in labour, private sector, service sector, trade

August 22, 2011

Investors run for cover as economic reality sets in

By *media update*

Market players may be making decisions with all the savvy of headless chickens. Investors stampeded out of equity markets last week. And, in all the chaos that followed, some long-standing market correlations broke down.

Econometrix chief economist Azar Jammine identified one anomaly. Gold is seen as a hedge against inflation while bonds are seen as a hedge against deflation. So prices usually move in opposite directions. Yet last week both assets were on a winning streak.

Chris Hart, the economist at Investment Solutions, pointed out another anomaly. Although the gold price soared, the rand remained weak; and, while the value of US treasuries rose, the dollar did not.

The immediate trigger for the flight from equities was poor economic data from the US and Germany earlier in the week. Without economic growth, the US and heavily indebted European governments won’t be able to reduce their debt burdens, extending indefinitely the threat to global financial stability.

The danger for investors is that the recent scramble into gold and bonds could be building up two bubbles. And what will happen when the bubbles burst?

Last week’s sell-off in equity markets was the third since the downgrading of US debt by Standard & Poor’s earlier in the month. The re-rating alerted markets to the extent of the threat to the economic recovery in the US.

Jammine commented last week that he was surprised that it had taken financial markets so long to wake up to the danger.

Last week’s losses came despite the undertaking by the US Federal Reserve to hold its key interest rate at virtually zero for two more years, and despite the efforts of the European Central Bank to stabilise markets by buying Italian and Spanish bonds. This is an expensive remedy because it’s effectively printing money – a process that reduces the buying power of the euro. And the remedy hasn’t worked.

We have now started a new episode in the saga that began in 2007, when the US subprime market started unravelling. But are we getting any closer to the end?

We probably are because governments and central banks no longer have much fire power, after three years of intervention. But how will it all end?

Jammine predicts several years of very slow growth globally. While this is a gloomy prospect, it’s preferable to the alternative scenario of a series of asset bubbles – and their aftermath.

US and European bankers have been blamed for the financial and economic disaster that started in 2007. Rightly, because they were in the driving seat at the time, careening heedlessly through economic realities with offers of endless credit to fuel the consumer boom.

But they were not alone in their folly. One of the problems in advanced economies is that voters expect cradle to grave security – and life doesn’t provide that sort of blank cheque.

Politicians colluded in the illusion to get themselves into power. One of the ways they achieved this was by paying social pensions out of current revenue – unlike private retirement schemes which are obliged to have assets to cover their liabilities. The formula worked for decades but its efficacy is about to expire.

Europe, in particular, can see the writing on the wall as its working age population shrinks in relation to pensioners. So reality intrudes.

And, after being fed a steady diet of wishful thinking, since the end of World War II, voters won’t like reality. This creates a new challenge for politicians.

Article courtesy of IOL.co.za. Please click here to see original article

Leave a comment | posted in commodites, currency, inflation, monetary policy

August 12, 2011

Consumer revival ‘will help SA beat tough times’˝

By *media update*

Continuing global uncertainty would, however, harm gross fixed capital formation — vital to inject momentum into the economy’s growth trajectory

CAPE TOWN — A consumer-led economic upswing was already under way in SA and would continue in spite of turmoil on global markets that has wiped trillions off foreign bourses, a senior Reserve Bank official said yesterday.

“The patient is not dying, it is moving upward,” an upbeat Bank senior deputy chief economist Johan van den Heever told MPs.

Continuing global uncertainty would, however, harm gross fixed capital formation — vital to inject momentum into the economy’s growth trajectory. This uncertainty, arising from the US credit rating downgrade and the euro zone’s debt crisis, would probably see weak fixed capital formation delayed further, he said.

Business and consumer confidence would be hit hard by the “not wholly unexpected” global turbulence, Mr van den Heever told Parliament’s finance committee during a briefing on the Bank’s 2011 annual economic report and the June quarterly bulletin.

“It is quite clear that people will be more reluctant to enter into bold new ventures, big capital expenditure and heavily geared undertakings, and so that is not good news for short-term growth and probably longer-term investment,” he said.

“Things just might be delayed a bit further.

“One should recognise that … a consumer-led upswing which is not heavily credit dependent is a more sustainable animal.”

Mr van den Heever believed consumer-led growth would take the economy forward in spite of the international uncertainties. Household consumption expenditure had been growing solidly for the past seven quarters and was the backbone of the recovery.

His views gelled with those expressed by Finance Minister Pravin Gordhan and Bank governor Gill Marcus earlier this week. They said they remained confident in the growth forecast and fiscal projections outlined at the time of the budget.

Treasury officials would not comment on economic prospects ahead of the tabling of the medium-term budget policy statement in October .

Investment Solutions chief economist Chris Hart said yesterday that the Bank’s confidence in consumer-led growth could prove to be misplaced.

He said consumers were vulnerable to forces such as very high administered prices and the possibility that a weak rand would push up inflation, which would require the Bank to raise interest rates. But he was optimistic about growth this year.

Efficient Group chief economist Dawie Roodt said it was important to distinguish between financial market turmoil and economic fundamentals. SA would definitely not go into recession, Mr Roodt said, though growth might slow down.

Mr van den Heever noted that the strong rise in household consumption expenditure had not led to a higher debt to annual income ratio, which, while still high at 76,8%, had been trending downwards for two years. This was because consumers were not spending on credit but aligning spending with increases in real disposable income.

Low interest rates meant consumers were spending on average only 6,9% of their income on interest payments, which Mr van den Heever did not believe was high.

Another factor helping SA to weather the global crisis was that the higher level of investor uncertainty drove the gold price up to “juicy” levels — along with platinum and coal — boosting export earnings, Mr van den Heever said.

In addition, the Bank’s foreign currency reserve holdings were now very high at $50bn — a strong source of confidence as it meant SA could continue to pay for its imports.

While the decision of the US Federal Reserve to maintain low interest rates for longer might sustain the flow of short-term speculative capital into SA and boost the rand, this was “not a great concern”, he said. What was of real concern was the slow rate of growth in export volumes, which lagged far behind that of other emerging economies.

This was due to several factors including infrastructure bottlenecks, the lack of secure supplies of electricity, the cost of electricity and the rand’s strong real exchange rate.

Relatively low productivity in SA and the sluggishness in the economies of its traditional trading partners were also problems.

 

Article courtesy of Business Day – please click here to see the original article

Leave a comment | posted in commodites, economic growth, monetary policy, trade

August 11, 2011

Investing during increased volatility and uncertainty: Chris Hart, David Shapiro and Simon Brown

By *media update*

‘Find companies that are selling something to China, because…China’s growing well..’ – David Shapiro

HILTON TARRANT: We welcome Chris Hart of Investment Solutions to the programme. Chris, a number of interventions by governments around the world – the latest of these, the Federal Reserve in the US signalling that rates will effectively be fixed for the next two years to take us to mid-2013. We’ll hear from John Stopford of Investec as to the impact on the bond market in a couple of minutes. From where you are sitting, this latest signal from the Fed – the prospect of QE3 on the horizon – has this fixed anything at all?

CHRIS HART: No, I think it signals that we are going to have yield and growth a premium. That I think is important. The other big factor that’s going to be important, especially with what’s unfolded in the US, is solvency. That’s why I’m not too pessimistic about South Africa. There will be problems. We give yield, we give growth, and we’ve got solvency on our side, and I think those are going to be critical investment characteristics that we are going to need.
Effectively what the Fed has signalled is that we are not going to pay interest for a long time, because the interest rates are [near]…zero. That anchors it, because the US is of course the kingpin and the centre pin of the global financial system. And that means we are running the same risk as in 2003, 2004, when yield was at a premium. That’s where subprime originally started. You had this desperate search for yield and you could sell subprime into the market because it gave you a yield pickup in a very low-yield environment. And of course, the situation of yields being very low is going to dominate.
As to the solvency problem – bonds are not an obvious place to put money any more, because the value just seems to be fairly poor, and it may well be that shares – like for instance where they say Apple has got more money than the US government at the moment – shares that offer growth and yield at a good multiple jurisdiction, and within the South African context, like British American Tobacco and South African Breweries and that kind of thing, which manufacture things that are recognised as strong cash flow, strong balance sheet, etc, may well be the case to actually beat.
But obviously another big factor is your precious metals, and your Swiss franc has become the safe haven. …The dollar/euro hasn’t moved too much, but both have actually weakened against the Swiss franc and gold in this thing. I think we’ve had in gold about a 10, 12-year bull market. I think what’s going to happen now is that the pace of that bull market is going to pick up, and the Fed has basically indicated that…dollar cash is certainly not going to be able to compete with gold, especially if we see QE3. You can’t debase gold.
And at the end of the day I think we are going to see different safe havens emerge through this particular time.

HILTON TARRANT: David, listening to what Chris said about those diversified blue chips, it’s a theme that I think is consistent. Chatting to Theo Vorster of Galileo Capital just earlier this afternoon, he said this is a yield market – you need to focus on the shares that will be paying you dividends over the next three, four, five years.

DAVID SHAPIRO: To put what Chris says into context, if we look at the US 10-year treasury, it’s trading at about 2.25% at the moment. I think it was down as low as 2% yesterday. But let’s say it’s kicked up a little, so it’s 2.25% – I can find at least 150 companies in the US, in the S&P 500, that are paying higher dividends or giving you higher yields than 2.5%. So where do you want to be in 10 years’ time? OK, admittedly you’ve got to look at each one of those companies, but I agree 100% with Chris. Find companies that are selling something to China, because if you look at US trade numbers today, China’s growing well. The trade numbers, record exports and record imports, etc, just show you that, funnily enough, there’s another part of the world that’s doing OK. We seem to be so centred on Europe and the US. I agree, British American Tobacco, Richemont – which is luxury goods, which sounds odd but they are still buying – SABMiller. I still like the iron-ore companies like Kumba because they have such massive margins, 70% margins. Even if the iron-ore price comes down, they are still going to be paying 6, 7, 8, 9%, as we are now, or 10% dividend yields. You can add Exxaro, which is coal.

HILTON TARRANT: Let’s bring in Simon Brown now. He’s with JustOneLap. Simon, a day-trader short-term trader, how on earth would you begin to trade a market like this where one day a stock’s up 8%, the next day it’s down 10%?

SIMON BROWN: Thanks, Hilton. This is challenging trading, and let’s distinguish the intraday from the guy who might hold a position for maybe a couple of days, for maybe a couple of weeks. At the moment the short answer is that tradings are down. So when things are going up and looking green, you are looking for opportunities more than anything to actually enter new short positions. By that I mean short positions making money on the downside. And you don’t just go crazy. You would look for classic patterns, weakness on the buying side or something, and you wait for that to start to capitulate, wait for it to start to weaken, and then take that position. The wild swings we’ve seen at the moment – they are quite large and they are quite spooky. But if you are trading it you can do all right in it. You just need to catch the bit in the middle. You don’t need to take the complete extremes from it.

HILTON TARRANT: The message is pretty clear – find companies that are diversified, find those companies that will give you a decent dividend yield over the next couple of years. Find those companies that have a lot of cash on their balance sheets.

DAVID SHAPIRO: You can find them, Hilton. You don’t need to be a genius, you don’t need to be a nuclear scientist to look for them. It’s very simple. Just do your own homework, find them. I like what Chris says there – yield and growth are going to be at a premium, so don’t set the bar at 15%. Set it much lower.

HILTON TARRANT: And ignore these drops of 5% or 10%.

DAVID SHAPIRO: This is scary stuff, and I think also a lot the background to this is that investors have lost confidence, they’ve lost confidence in Obama – I’m using this in an American context – and in Congress, and also in the Fed. So no-one’s coming out with a proper plan. We are very long on what’s wrong, but we are very short on solutions.

 

Article courtesy of MoneyWeb.co.za – please click here to see the original article

Leave a comment | posted in investment, media update

August 11, 2011

SA growth will depend on global developments

By *media update*

External developments will be key for SA’s growth in the next five years, according to Investment Solutions’ Glenn Silverman and Chris Hart, who are chief investment officer and chief strategist respectively.

Factors assisting in economic growth prospects over the next five years were commodity prices, higher yields, sovereign solvency, corporates and shorter term capital inflows, Silverman said.

Rising union power, regulatory obstruction, administered prices, economic policy and government efficiency were identified among factors that could deteriorate growth prospects.

An Investment Solutions survey of asset managers for the seven months to July showed that asset managers expected SA’s growth to average between three and 3.5% in 2011.

It was highly likely for managers to downwardly revise their growth forecasts when the next survey is done early next year given the signs of a slowdown in the global economy and the weak performance by some local sectors, Silverman noted.

Closely linked to growth were inflation and interest rate developments. Investment Solutions said in case of a significant economic slowdown, there was “very little ammunition” for authorities in development nations to use given that they had already slashed interest rates to zero levels.

The picture was different in emerging market economies which, faced by rising inflation, were resorting to monetary policy tightening.

“The question is, are they [rates] going up enough in emerging markets,” Silverman said.

In SA, most local economists expected the SA Reserve Bank to keep lending rates on hold at 5.5% until early next year, given the sluggish growth and weaker than expected economic indicators.

Local and global equities came under significant pressure recently following the downgrading of US debt by Standard & Poor’s from AAA to AA+.

Silverman said that despite the volatility, equities were likely to “rally” in the short-term.

 

Article courtesy of BusinessLive.co.za – please click here to see full transcript

Leave a comment | posted in commodites, economic growth, inflation, monetary policy, politics

August 5, 2011

S.Africa better placed to meet external shocks than in ’08

By *media update*

JOHANNESBURG, Aug 4 (Reuters) – With foreigners holding 27 percent of all rand-denominated debt, South Africa is heavily exposed to an exodus of capital in the event of a eurozone debt default, as affected banks dump overseas assets to shore up their balance sheets.

However, this scenario — essentially a reprise of the 2008 financial crisis, which knocked 39 percent off the value of the rand — is far from certain given the growing view that risks in established markets may be just as high as in emerging ones.

“It’s not clear to me that a deterioration of the Europe situation will lead to a sell-off,” said Chris Hart, economist at Investment Solutions, a Johannesburg-based fund manager.

“If anything, investors will need to park their money somewhere and emerging markets, with their high yields, could be the place.”

South Africa’s budget deficit is 5 percent of GDP for 2011/12, which is too high, but the government has outlined a credible plan to cut that to 4 percent by 2013, and its total debt stock is just over a third of GDP, making it relatively attractive to investors fleeing, say, a Greek default.

The fact South African bonds are performing so strongly at present and the rand hit a two-month high of 6.625 to the dollar last week suggests some are already making this calculation.

“I’m not advocating that South Africa would continue to rally if things deteriorate but it would not be a crisis,” said Di Luo, regional fixed income strategist at HSBC, adding that real yields made South Africa an appealing option.

“I don’t think investors would punish South Africa indiscriminately.”

PREPARED FOR THE WORST

True to form, those overseeing Africa’s biggest economy are bracing for the worst, with Finance Minister Pravin Gordhan saying in a newspaper column last month that South Africa would not escape unscathed from a deeper euro crisis.

Similarly, new Treasury Director General Lungisa Fuzile warned this week of a spike in borrowing costs — now at 9-month lows — should the debt situation in Europe deteriorate.

Sharply higher bond yields would put pressure on the central bank to raise its benchmark lending rate from three-decade lows of 5.5 percent, potentially killing off an already sluggish economic recovery.

Analysts, however, think policymakers may be over-doing the doomsday scenario.

“The Reserve Bank and Finance Ministry are overplaying the risk. South Africa is much more of a safe haven than these other countries,” said Peter Attard Montalto, emerging markets analyst at Nomura International.

“I don’t think they’ll be selling their debt because of what happens in Europe,” he added. “The fiscal situation and debt levels make South Africa more of a safe haven.”

That is not to say Pretoria can relax.

As an economy, South Africa is far too reliant on foreign portfolio flows, the lion’s share of which goes into liquid assets such as stocks and bonds, which can easily be dumped, rather than bricks and mortar, which cannot.

For example, in 2010, offshore funds poured 107.9 billion rand ($16 billion) into South African stocks and bonds, compared to just 11.4 billion rand in direct investment.

“Unfortunately in this sort of global environment where South Africa — like other emerging markets — has been the beneficiary of sizeable foreign flows the risks are heightened because the country still faces this big mismatch of foreign direct investment and portfolio investment,” said Razia Khan, head of Africa research at Standard Chartered.

“Just because we have not seen a correction in recent times means that sell-off may be great in its magnitude when it does take place.” ($1 = 6.771 South African Rand) (Editing by Ed Cropley, Ron Askew)

Article courtesy of Reuters.com – please click here to see the original article

Leave a comment | posted in currency, economic growth, markets, media update, speculative

Follow

Get every new post delivered to your Inbox.