It is possible that the biggest financial catastrophe of our generation may have an upside for the South African economy.
While the JSE tumbled in line with other global markets, falling 4,55% in the first two days this week, it was the resource stocks that led the decline, falling 9% compared with a 2% decline for the financial and industrial index.
This suggests that in South Africa investment concerns are focused on global growth and commodity prices rather than the stability of the local economy and financial sector.
The weaker commodity environment could be good news for interest rates locally. The collapse of commodity prices in the past two months has had the benefit of the oil price plummeting below $90 a barrel.
According to Steve Minnaar, head of equity at Omigsa, at the end of June the price of oil in rands had rocketed 116% compared with a year ago. This had a significant impact on July’s inflation figures. In comparison this week’s rand oil price it is up 32% compared to a year ago.
The high base price of oil could see year-on-year changes in the oil price move negative if oil remains at current levels and the rand treads water. A zero increase in the rand oil price year on year will have a significant impact on inflation. At the same time fears of a global slowdown are expected to result in further rate cuts internationally, with China already cutting rates this week. Lower inflation locally and a generally looser monetary approach globally could bode well for future interest rates in South Africa.
However, Minnaar says this scenario depends on how the rand holds up in the next couple of months. So far the rand has been one of the better performing emerging market currencies.
Although marginally weaker, the rand has remained relatively steady in the past six weeks when compared with the 20% fall in the Australian dollar or 15% fall in the Brazilian real over the same period. These economies are playing catch-up to South Africa, which saw the currency depreciate earlier this year as a result of a political and electricity crisis, as well as aggressively higher interest rates, which dampened our economic outlook.
Unlike South Africa, other emerging countries such as Brazil, China, India, Malaysia, Taiwan and Indonesia chose not to hike rates and rather subsidised food and oil prices, protecting their economy from real inflation pressures and allowing their economies to continue to grow.
South Africa’s strategy threatened the growth rate at a time when the current account deficit continued to grow. However, it seemed for a while that the last laugh would be South Africa’s, as Minnaar says the subsidy model was an untenable situation and at some point the subsidising countries were going to have to remove the subsidies and face the reality of higher inflation and higher interest rates.
But the collapse in commodity prices has saved them from this reality. China, while cutting its subsidies, has been able to cut interest rates. The threat of inflation is at the moment tempered. ”In hindsight not hiking rates may have been the right thing to do, but countries following either path have to face the fact of a slowdown in economic growth.”