Hi there,

South Africa

Every 6 months or so you get a genuine opportunity in the markets to step up to the plate, put that glove on and make the call. Truth be told it’s been extremely frustrating of late to write intraweek commentaries on the ZAR as the intraday swings are so erratic and random that I’ve just been finding myself in a position of just putting pen to paper for the sake of it.

Imagine if I had the foresight ahead of time for a particular week on GBPZAR – my commentary would go something like this: Monday we’ll be up 60 cents followed by a 40 cent drop on Tuesday. This will be followed by another 30 cent drop Wednesday but we should see a strong bounce on Thursday up 70 cents. Can you imagine? The above could be a genuine daily commentary on the intraday ZAR moves of late but to call the above is just crazy – and impossible.

I far prefer to be patient and wait for a genuine opportunity to arise in the market before stepping up to the plate and making a seriously big call. I get calls and e-mails all the time from people asking me where I think the market is going but people also tend to forget that the market has bounced from 10.30 to 16.30 in a very short space of time. It’s a tough call at these levels to say where it will go in the short term.

As many of you know the MPC raised interest rates by 50 basis points this past week taking the base rate in SA to 11.5%. There were some expectations in the market even for a 1% increase. Now here’s the problem. SA are way, way behind the curve. I’m not sure if they haven’t noticed but the rest of the world are facing a major credit crisis which has seen certain sectors of the stock markets crash, and some currencies take some serious pain. Both the US and UK are cutting interest rates aggressively to try deal with this crisis whilst SA are raising rates.

There’s a major storm brewing here and the SA economy is in far bigger trouble than people realize. Trevor Manuel still expects 4% growth and Tito Mboweni still has an inflation target of 4-6% (even though official inflation is running at well over 10% with real inflation well over 20%). This inflationary pressure is being made worse by a weakening ZAR resulting in imported inflation, and this can only result in further interest rate hikes.

But it’s only at ground level that you can get a clear view of the major problems on the horizon for SA. In the past few days I’ve read articles that people can simply not afford to survive in SA anymore. Unfortunately annual 5% salary increases just aren’t able to match the real inflation of 20%+.

The second major problem stems from a conversation that I had from a housing developer who reckons they simply cannot sell houses in SA anymore. High interest rates aside, the new credit act also means that around 80% of all bond applications are being rejected. So here’s the problem – people can’t afford to buy new houses due to the new credit act, and people who already own and have bought houses in the past few years are taking some serious strain keeping up with the bond repayments. It seems to be a very similar story unfolding to what happened in the US.

My concern is that you can draw very close parallels between the US and SA economies. Huge record trade deficits (at the moment being comfortably funded in SA but these are always volatile, unreliable flows), growing inflation exacerbated by the weakening ZAR, slowing growth .etc. I genuinely believe there is a major major credit crisis brewing in SA and if people are just able to open their eyes and minds for a few moments then it seems clear to me that there could be major trouble on the horizon.

FDI and other investment inflows currently funding the trade deficit could dry up very quickly if this Zimbabwe issue doesn’t sort itself out soon. It’s not looking good though and I think this could have serious consequences for international investment in the region.

There is a lethal combination of economic, inflationary and political pressures in the SA economy that are looking pretty scary from where I’m sitting. These are presently being covered up by political spin but the warning signs are so obvious to an open mind.

Let’s simply list the isssues: Weak ZAR, Huge real inflation, Lower growth, High and rising interest rates, Credit squeeze starting, Pressure on property market due to credit act and high interest rates, , Record trade deficit around 8% of GDP being supported by FDI and other spec inflows, Zim teetering on the edge.

To be honest, the above doesn’t sound like a healthy economy that I would like to invest in and I’m pretty sure that soon other people will start thinking the same.

I’m sure that a fair deal of the above are currently reflected in the value of the ZAR as we’ve seen a massive drop over the past 6 months but I seriously see a major credit squeeze on the horizon (as well as destability in the SADC region). Within the major trend current levels in my opinion are good levels to start shorting the ZAR without being too aggressive as the intraweek swings can be pretty wild which are also reflective of the potential wild times ahead.

View for the week: Weaker ZAR dependent on Zimbabwe developments in the short term

Good luck and all the best for the week ahead!

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