The US government shutdown saw some strength in the rand on dollar weakness. Should the closing of many non-essential state services in the US stretch to a week or more, then domestic markets are likely to feel an even greater impact.
The US Federal Reserve’s asset purchase programme of $85 billion (R850bn) a month is likely to be reduced to a progressively smaller monthly amount from the start of next year, although previously markets thought quantitative easing tapering would begin last month.
However, the longer the US government “shutdown” persists, the greater the likelihood of delays in tapering.
Senate Democrats and the White House rejected the refusal of Republicans in Congress to approve a spending bill to raise the US debt ceiling of $16.7 trillion unless the implementation of the Affordable Care Act (also known as Obamacare) was postponed by a year.
The health-care law (passed three years ago and upheld by the US Supreme Court), would have delivered health insurance to uninsured Americans starting yesterday, but not without the necessary funding.
The partial shutdown extends to all non-essential services provided by the government. It is essentially a spending freeze on the disagreement over raising the $16.7 trillion debt ceiling.
Essential services that protect life – such as the military’s active duty personnel – will remain active (though their pay cheques are likely to be delayed). Nuclear reactors will continue to operate, the National Hurricane Center will track storms, and air traffic controllers and security personal will remain at work, although there may be delays.
Medicare and Social Security will continue, with potential delays, because they are financed through trust funds. The US postal service will keep running because it is funded through postal fees and all departments and contracts can continue running on funding already appropriated.
The effect of the government shutdown will be gradually more severe and it will do greater damage to economic growth the longer it persists. The previous shutdown occurred in 1996 and the longest one lasted 21 days.
We expect that the shutdown will not stretch until October 17, because this is the date the US is likely to default on its debt if no agreement to raise the debt ceiling is reached before then.
A “clean bill” is expected to be presented to the Senate, stripping out the criteria that impede the start of mandatory health-care insurance for uninsured Americans. Should this not occur, the shutdown would become more severe, affecting the courts and shaving further growth off the economy.
While markets have priced in the initial partial shutdown and Republicans are still adamant that agreement on government funding requires a delay in implementing the Affordable Care Act, we continue to believe this will be resolved in the next couple of weeks, avoiding US default.
* Annabel Bishop is the group economist for Investec.