Looking back on 2010
It has been two years since the global financial crisis occurred and as predicted back in 2008, the repercussions that have been faced after the event have been deep-rooted and severe. From a global economic perspective this year can be likened to a horror movie…keeping us at the edge of our seats, waiting for the next disaster to emerge, with the expectation of blood and gore, while at the same time hoping that the ending credits are near. Although South Africa has been somewhat sheltered from the direct onslaught of much of the problems that have been faced by the developed world, we have not escaped completely unscathed. The European sovereign debt crisis, a weak US economy and other global economic concerns have all had a labyrinthine consequence for our economy.
We started the year out quite positively, still riding on mid-2009’s momentum. Although conditions were still deemed to be fragile, the shorter-term outlook at the beginning of 2010 was definitely favourable. Much of the focus during the first part of the year was directed at the FIFA World Cup, with many South Africans seeing it as a venerable golden ticket that would bring wealth, abundance and growth to our people. While the event was most certainly a resounding success, it seems that the immediate economic effects are still somewhat unclear, and for now it seems that we may have overstated the short-term benefits. Economic growth has steadily lost momentum as the year has progressed with GDP coming in at a respectable 4.6% in Q1, 3.2% in Q2 and a disappointing 2.6% in Q3.
Consumer price inflation started the year off above the upper 6% limit of the South African Reserve Bank’s inflation targeting range, but as the year moved on, steadily decreased. Weak household demand and a strong rand placed downward pressure on prices. This, coupled with lower local and global food prices as well as lower import costs, saw inflation moderating sharply in the second half of the year, eventually reaching the lowest levels it has been at since July 2006. The main driver of the medium-term inflation is of course the prospects of the rand.
Against the backdrop of subdued inflationary pressures and moderated economic growth, at the end of 2008 the Monetary Policy Committee (MPC) adopted an accommodative monetary policy stance, which saw them reduce the repurchase rate by a cumulative 450 basis points between December 2008 and May 2009. By September 2010, this monetary policy easing cycle continued, although at a much slower pace, and for much of the year we were all left to play guessing games as to what the Reserve Bank would do next. The rand’s persistent strength and subdued global and economic growth eventually led to a further rate cut, and at present the 5.5% repo rate and resultant 9.0% prime rate is the lowest it has been since 1974.
The rand and its surprisingly surging strength has been the focus of much debate and scrutiny over the last few months. The monetary policy action of major central banks saw the interest rates in developed countries reaching record lows, and as a result of this investors started to seek a higher yield in emerging markets – South Africa being one of them. At the end of the last quarter, a record $70 billion foreign money flowed into our country, and as a consequence, the rand appreciated by an average of 10% on a trade-weighted basis in the first half of the year alone. This has raised concerns about the attrition of South Africa’s export competitiveness and the effect it will have on our domestic growth. Fears concerning the effects of the strong rand reached such heights during the past year, that there have even been talks about introducing a Tobin tax on all foreign inflows, in order to stabilise the local currency. However although Treasury did confirm that there was an ongoing discussion to find ways to achieve a more competitive exchange rate, there was no confirmation at any point as to whether such a tax would ever be implemented. At present, besides some volatility due to changes in risk appetite caused by the debt problems in the Eurozone, the rand is still holding firm. Should the current favourable conditions in the bond market hold, there is a possibility that the rand could appreciate even further, provided that all other economic conditions hold as well. One should note that there are still two key risks that could see investors exiting the market, resulting in a sharp depreciation of the rand. Firstly, the sovereign debt crisis in Europe is still looming, and secondly from a local stance, should there be a fiscal and monetary policy blunder, it could result in a mass exodus by investors.
The first half of the year saw the bond market recovering somewhat from the incredibly dismal performance of 2009, and as the year progressed, the sector gained momentum. By the end of 2010 the local fixed interest space produced much stronger returns relative to the start of the year. Large net foreign inflows have further supported the already buoyant rand, and this together with lower than expected inflation figures has resulted in a rally in the bond market during the last few months. After staging a phenomenal recovery from the crisis of 2008, equity markets surged on until the second quarter of 2010, whereupon markets fell mainly due to global economic concern over a double-dip recession, on the back of the European sovereign debt crisis and weak US economic conditions. Equity markets managed to rebound in the second half of the year, as low international interest rates and further quantitative easing drove investors to seek yield elsewhere, specifically in emerging markets. Property proved to be the most consistent and stable asset class of 2010, as the sector had a strong year and remained resilient against much of the uncertainty in the global economic environment.
The price of oil was also not immune to the fragile global economy and fluctuated throughout the year. Earlier in the year OPEC commented that it expected oil to trade between $60 and $80 per barrel for the remainder of 2010. However seemingly improving conditions around April prompted them to change their stance and comment that it was more likely for the price to remain between $70 and $85 per barrel. As the year progressed, we saw this prediction play out. Factors like the European sovereign debt issues, poor US economic conditions, declining market sentiment, the weaker US dollar and further quantitative easing all contributed to volatility in the oil market. However, as OPEC commented during the first half of the year, the price did not (on average) fall below the $70 threshold or breach $85 per barrel.
The risk aversion and fears created by the unstable global markets caused many investors to seek refuge in safe-haven harder assets like gold. As a result of this we saw the price of gold increase as 2010 progressed and eventually surge to a historic high of $1365.5 during November.
As we move into a new year, people often take a step back to take stock of the year gone by. To celebrate our victories, acknowledge our mistakes and admit certain defeats. The year has been quite an astonishing one, and if nothing else, has taught us that the age old saying that the ‘only certainty in life, is uncertainty itself’ definitely holds true. It remains to be seen whether the year ahead sees us feeling a little bruised and battered but still victorious (like Rocky Balboa), or whether the current uncertainty and occasional mayhem (akin to the Rocky Horror Picture Show) prevails.
