The political gridlock over the US debt ceiling could have a positive but temporary spin-off for South Africa and other emerging markets – provided the US does not default on its debt commitments.
At the eleventh hour the bipartisan leaders of the US Senate reached an agreement late yesterday to end the immediate fiscal impasse and to increase US borrowing authority temporarily. Bloomberg reported yesterday that investors holding $120 billion (R1.2 trillion) of US treasury bills due had been worried they would not get paid.
The accord meant the damage to global confidence caused by the stand-off would not be too serious, Stanlib chief economist Kevin Lings said. And the period of uncertainty has postponed the end of five years of quantitative easing (QE) – the easy money policy designed to stimulate US growth.
Sentiment was boosted by that possibility and the JSE all share index ended 0.27 percent up at 44 418 points yesterday from 44 297 previously. The rand firmed from R9.9569 to the dollar to R9.8746 at 5pm.
Ishaq Siddiqi at ETX Capital said stocks on both sides of the Atlantic had been rising during the day on expectations that a deal was in the offing.
Lings said recent events had pushed out the date of the start to QE tapering from January to “some time” next year. A new Federal Reserve chairman is due to take over from Ben Bernanke in January and is unlikely to make an immediate move.
The start to tapering has been delayed since last month, which helped the rand to recover from a worst level of R10.40 a dollar on August 28.
A continuation of the easy money policy over the next few months will support global risk appetite, according to Annabel Bishop, the chief economist at Investec. “The partial US government shutdown has seen the rand strengthen on US dollar weakness and South African bond yields improve, on the expectation that a delay in the tapering of QE will occur.”
Bishop noted: “The International Monetary Fund (IMF) is calling for the scaling back of QE to be timed carefully.” The IMF said the normalisation of monetary policy “should be well timed, carefully calibrated and clearly communicated”.
This is in line with sentiments expressed by Finance Minister Pravin Gordhan on his return from a Group of 20 meeting in Russia. However, South Africa will eventually face a day of reckoning when tapering starts and funds are diverted from emerging markets back to the US.
Strengths and weaknesses in the economy were highlighted in a recent report from Moody’s Investors Service. The rating agency, which affirmed the country’s Baa1 rating in July after cutting it one notch last year, noted that public debt was “manageable” and foreign currency exposure low.
It said external liquidity was “good, reducing government’s vulnerability to financial market and exchange rate volatility”. But it warned: “Elevated strike activity continues to affect the investment climate.”
BMW South Africa “has shelved plans to produce its newest model in the country due to the ongoing labour instability… [this] is tangible evidence of the negative impact that the increase in work days lost to strikes in the past two years is likely to pose for the medium-term outlook of the economy,” Moody’s said. page 24