Foreign flows important to balance the books

The global credit crisis has thrust South Africa’s dependency on global capital flows to centre stage, especially as the country’s risk rating has been downgraded by three of the world’s four large credit-rating agencies. Given South Africa’s high current account deficit, this news is cause for concern, says Dr Prieur du Plessis (pictured), Plexus group chairman.

“The current account deficit has so far been financed by foreign portfolio flows,” says Du Plessis. “These are notoriously fickle and this year has already seen net outflows of R53 billion and R0.4 billion from equity and bond investments respectively. A turnaround in this situation should not be expected before the global credit situation calms down and investors develop a renewed appetite for risk.”

He says sound economic policy is one of the reasons why South Africa has been able to weather the global credit crisis reasonably well thus far. However, “rating agencies are becoming cautious about South Africa mainly due to fears that Jacob Zuma’s ANC could yield to pressure and adopt policies that harm investor confidence.”

“Any further downgrade in South Africa’s rating and/or meltdown of the global financial situation could significantly impact on the flow of foreign capital,” says Du Plessis. “Without that capital the current account deficit could increase so sharply that the value of the rand would be under severe pressure.”

This in turn could have a detrimental effect on inflation and ultimately interest rates, he says. “The reintroduction of prescribed assets for retirement and other funds – by forcing institutions to hold minimum percentages in certain debt obligations – would also not be far off in such a scenario.”