Economist believes emerging markets are now less fragile
Despite all the negativity the local economy has faced since the Cabinet reshuffle in March, it is still not reflected in the rand, which could indicate that emerging markets are “not as fragile” as they used to be, which bodes well for future investment.
Speaking at a breakfast meeting in Sandton, Bureau for Economic Research (BER) senior economist Hugo Pienaar explained that the current account deficit, which had seen “nice improvement since 2013”, meant that South Africa’s external financing requirements were lower than before, pointing to the country requiring less foreign capital at this stage.
“We’ve seen a continuation of that this year – we actually went into surplus on this trade balance,” said Pienaar, adding that, over the last couple of months, the country had experienced big inflows into its equity markets. Paired with bond inflows, it indicated that South Africa was, in fact, still receiving capital.
However, Pienaar highlighted that most of these inflows came on the back of stronger commodity prices, such as for iron-ore and coal, which have already flattened out. “Already, there is a bit of concern about whether this improvement in the current account will be sustainable,” he noted.
Meanwhile, he said, the biggest concern was State-owned enterprises (SoEs). “Will there be increased guarantees for these entities? The biggest fallout from the junk status so far is that SoEs are no longer in a position for lending,” he noted.
DowngradePienaar added that the BER’s assumption with respect to the rand was that it would be weaker by the end of the year than at present.
“Before the downgrade, the market was moving towards pricing in interest rate cuts towards the second half of the year, but we think that is off the table. It is highly unlikely in an environment where there are concerns about fiscal policy,” he said.
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