Ignore the warning signs at your peril
Taking a quick look at locally listed share prices you would be correct in wondering whether investors are aware of the domestic and global economic challenges that lie in wait in the coming year. Domestically we are faced with the terrible twins of food and oil price inflation – and internationally we wait patiently for the full impact from the bizarre sub-prime situation to materialise.
We call it bizarre simply because international economists and politicians seem unable to get to grips with the true magnitude of the problem. Banks change their exposure estimates on a daily basis, with market commentators forced to change their numbers in response. South Africa can watch detached as experts put the problem at a few billion dollars one day, then bump the sub-prime fallout number to USD 200 billion the next. Which begs the question: If markets hate uncertainty (and we’re told they do) then how can global equity markets power ahead in the face of such uncertainty?
At least our finance minister understands the severity of the situation. “Banks lost huge amounts of money. More than $50 billion has been written down and because there is a pipeline behind this, the number is going to be probably in excess of $2 trillion. A lot of these positions will be closed out in the next year,” said Trevor Manuel, speaking in Parliament on Tuesday.
US problems will hit South Africa hard
What many South Africans don’t realise is that the US approach to its credit crisis will have a significant impact on our domestic economy. The reason is that the US and South Africa are at different points in their respective interest rate cycles. The US is being forced to cut rates to try and soften the impact of bad lending practices on its citizens. The UK is at a similar place, though for slightly different reasons. South Africa, on the other hand, is hiking rates in an attempt to curb inflation and slow spending in an overheated economy.
The result is that South Africa becomes an attractive destination for yield seeking international investors. These investors (and funds) have billions of dollars to invest in the best returning ‘safe’ asset class – SA rand. Their insatiable hunger for domestic currency causes the rand to strengthen – not the best idea when we are trying to curb domestic consumption expenditure.
We face another hurdle when our interest rate cycle turns. Suddenly the yield seeking investors have better outlets for their funds. At the push of a button billions of dollars are sucked out of South Africa, leaving the rand in free fall and adding to inflationary pressures again. Hands up anyone who wants Mboweni’s job now.
Oil and food prices are a global problem
The above debate has prompted many economists to suggest Mboweni should leave interest rates unchanged in December. And there are two more arguments to add weight to this request. First is that the oil price, one of the main drivers behind domestic price inflation, cannot be controlled by the South African central bank. Oil is going up regardless of what Mboweni decides.
Second is that food price inflation is not a domestic phenomena. Food prices have been surging around the world, in both developed and emerging markets. If the US and UK can cut rates despite food price inflation – then why shouldn’t South Africa. In summary, a further interest rate hike will not put the brakes on oil and food prices.
The ultimate irony is should Mboweni hike interest rates again, he risks plunging South Africa into recession in the heart of the biggest economic boom in history. All it takes is for two successive negative performances to qualify – and given latest manufacturing growth at a fragile 2%, this could occur sooner rather than later.
Doom and gloom on the shop floor
New passenger vehicle sales are already in recession – and credit retailers (and general retailers too) are feeling the crunch. Large retailers are struggling to post turnover growth in today’s difficult operating environment. Apparel retailer Foschini for example recently posted a full year increase in revenue of only 8%. Listed furniture retailers like Steinhoff and JD Group are also expected to take strain. Food retailers are struggling slightly less as demonstrated by Spar, which reported solid full year results recently. Even so, management at these companies will have to focus on cost and other savings rather than revenue growth to get them through 2008.
What can we expect in December? We will let Mr Mboweni answer that question: “If I was the only member of the Monetary Policy Committee (MPC), I would definitely increase rates in December.” Mboweni is not the only member of the MPC – but we have it on good authority that he has significant influence there...
Editor’s thoughts:
Financial advisers are probably the first to witness the real impact of repeated interest rate hikes on the average consumer. Have these interest rate hikes been hurting your clients – and if so what are the first ‘optional’ purchases to be sacrificed. Click here to post your comment online – or send it to [email protected]
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