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After a disastrous start to the year, local bonds and shares are once again attracting off-shore investors. In January, non-residents sold a net R30.4 billion worth of domestic securities, according to figures from Citi.
However, flows turned positive in February, with net purchases of R5.1bn, followed by R11.3bn last month. And, by Thursday, non-residents had invested nearly R6bn this month.
The outflows, which started in May last year, were triggered by news that the US would tighten its monetary policy. January marked the start of the tapering of quantitative easing (QE) and each month will see liquidity fall further in the US market as the Federal Reserve cuts its bond purchases. The lower the level of cheap money in the world’s largest economy, the higher US interest rates are likely to go.
This in turn makes it less likely that global investors will place their funds in emerging markets.
But, despite the expectation of continued US tapering, there are signs the emerging market tide may be turning.
Consulting FNB economist Cees Bruggemans noted last week that the rand had clawed back nearly 8 percent of its value over the past two months and the JSE all share index had reached “new record highs north of 48 500”.
And he described the gains as “entirely a reflection of global events, especially a decline in uncertainty and market volatility as global participants gained greater confidence regarding the Fed’s intentions.”
Another factor has come into play: the US government’s finances are improving. QE was needed in the first place to ease market pressures as the US government funded its massive fiscal deficit. Stanlib chief economist Kevin Lings points out this deficit has declined by more than $1 trillion (R10.4 trillion) since its peak in 2010, to $500 billion, which is “a lot more manageable for the private sector than funding a deficit of $1.5 trillion”.
He warned: “This does not mean that bond yields won’t rise as QE draws to a close, but the sell-off is likely to be less pronounced than many feared a few years ago – especially with consumer inflation sticky at below 2 percent and the federal funds target rate still on hold at 0 percent to 0.2 percent.”
Writing in the Gulf Times last week, Laura Tyson, a former chair of the US president’s Council of Economic Advisers, forecast a rebound in emerging markets. “The outlook for investing in emerging-market economies, particularly those with strong macroeconomic fundamentals, stable political environments, and an expanding middle class, is promising”.
So how does South Africa measure up?
A critical macroeconomic fundamental is the large current account deficit – the gap between revenue from exports of goods and services and the import bill. At last count the deficit was still wide but improving. Stanlib’s Lings noted, in the final quarter of last year, it had narrowed sharply to minus 5.1 percent of gross domestic product (GDP), down from a revised minus 6.4 percent of GDP in the previous quarter. He said that this was much better than market expectations for a deficit of minus 5.5 percent of GDP.
Despite the dramas unfolding on the political scene, including ongoing scandals around corruption, South Africa’s robust pre-election debate is testimony to the strength of its institutions and therefore its political stability.
As to the middle class, research by UCT’s Unilever Institute of Strategic Marketing found that the black middle class population had grown to 4.2 million last year from 1.7 million in 2004. This could be described as two-and-a-half out of three. But even this score is at risk if the turmoil in the country’s labour market does not subside. If mineworkers remain on strike, exports will be weak, keeping the current account deficit high and making South Africa dependent on foreign investment inflows.
Moreover, the acrimony on the labour front will spill over into politics and society at large – a hugely destabilising factor. And the distress in the mining sector will erode the social and economic gains that have been steadily lifting people out of poverty and into the middle class.
So a lot is riding on the ability of the mines and the unions to find a way forward out of the impasse. And the role of the government may be critical to finding an acceptable formula for all concerned – including offshore investors whose savings fund our current account deficit.