[DEBATE] : (Fwd) Another run on SA?

[ted powers]

While there is compelling evidence that South Africa is, in fact, going to have its currency go through a period of instability leading towards depreciation in its exchange rate towards its major trading partners (US, UK, EU), it also may be the case that the interest rate differential between South Africa and the US, which is continuing to widen as the Fed cuts interest rates to avoid the inevitable credit crunch, will lead to a 'carry trade' between US and South African securities. That is, to borrow in US dollars at a lower interest rate and purchase South African securities at a higher interest rate, essentially ensuring a fixed profit rate for a given period.

If this follows, portfolio capital flows, or 'hot' money, may flow into the country and temporarily offset the pressure on the current account. The question underlying the more abstract issue of exchange rates and interest differentials is how South Africa can decrease its import dependency in order to remove pressure on its finances, particularly in a context where all signs are pointing to depreciation in its exchange rate, and thus more expensive imports. Outside of a full-on "de-linking" from the global economy, how is South Africa to extricate itself from the import dependency-high interest rates trap in which it currently finds itself?

> Date: Wed, 30 Jan 2008 07:58:25 +0200
> From: pbond at mail.ngo.za
> To: vodamail.co.za:SA discussion list debate at lists.kabissa.org
> CC: 
> Subject: [DEBATE] : (Fwd) Another run on SA?
> 
> (Let's see: Feb 1996, June 1998, Dec 2001, May 2006... is it time again?)
> 
> www.bday.co.za
> 30 January 2008
> Foreign sell-off imperils current account, rand
> Renée Bonorchis
> 
> SINCE Thursday last week, foreigners have sold up to R8bn of local bonds 
> and equities as the global market crisis has played out, making January 
> the third consecutive month of net sales for SA.
> 
> This puts the widening current account deficit, which is financed 
> through foreign inflows, and the rand at risk.
> 
> Leon Myburgh, a sub-Saharan Africa specialist at global financial house 
> Citi, said his equity team was not surprised by the large net sales on 
> Friday last week, given that offshore accounts were heavily invested in 
> platinum and gold stocks, “and following the news that some mines were 
> shut down due to electricity generation shortfalls, nonresidents were 
> better sellers of these stocks”.
> 
> The last time foreigners were dumping domestic stocks and bonds was in 
> 2003, but back then the current account deficit was 1,1% of gross 
> domestic product. The deficit was more than 8% in the third quarter of 
> last year. “The power shortfall could hardly come at a worse time, and 
> the vulnerability of the rand has clearly increased,” Myburgh said.
> 
> According to the latest statistics from the JSE and the Bond Exchange of 
> SA, foreigners have sold off 171% more in equities than they had at this 
> time last year.
> 
> The bond market has not been hit as hard although it is trending towards 
> net sales for the month. However, the latest numbers show there were 
> slightly more purchases than sales on Monday, unlike the sell-off the 
> JSE encountered.
> 
> “In the month to January 28, nonresidents have sold R7,8bn. Clearly the 
> power outages are having a material impact on expectations for growth 
> and company profitability,” Myburgh said. “Given the sharp reduction in 
> risk appetite in the first quarter, it seems difficult to look to the 
> carry trade as a major source of financing for the current account deficit.”
> 
> But while many analysts see the selling as a change in risk appetite, 
> Rudolph Vermeulen, a derivatives trader at online brokerage Global 
> Trader, said some investors were just taking their profits in an attempt 
> to weather stormy markets elsewhere in the world.
> 
> He reckoned the electricity problem was making that decision easier for 
> foreign investors and that it was far more pressing than any of the 
> political wrangling that might be going on in SA.
> 
> “I think it will continue,” Vermeulen said. “The idea that we will run 
> at full steam until 2010 has now gone out of the window.”
> 
> As he pointed out, those who had bought into the likes of construction 
> company Murray & Roberts for R20 a share back in early 2006 would have 
> seen that share climb 400% to R100 before coming back to the R75 level.
> 
> But as Vermeulen said, the long-term effect of a continued sell-off was 
> “definitely not good for the local economy”. Apart from hurting the rand 
> and threatening the current account, it will cause the Reserve Bank to 
> use hard-won reserves to shore up the deficit. Those reserves were part 
> of the reason that ratings agencies upgraded SA’s international credit 
> status.
> 
> If they were to be whittled away, SA would be at even higher risk of 
> being rerated downwards. In turn, SA’s ability to raise capital offshore 
> would be hurt.
> 

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