/ 27 April 2009

No spring in sight

If the financial crisis and ensuing economic slow-down is a winter of global discontent, we are nowhere near spring.

Despite eager reports of ”green shoots” — signs that the world’s economies are starting to recover — experts and international bodies such as the International Monetary Fund (IMF) say that although some stability has returned to markets, more needs to happen for a real turnaround.

Apparent green shoots include spikes in global mergers and acquisitions activity, improved risk appetite on behalf of international investors, increased stability in global stock markets and expected growth from economic behemoth China.

But the IMF warned that recovery is not yet a certainty. On April 22 it announced that the global economy is projected to shrink by 1.3% in 2009, with slow recovery expected to take hold next year. In its Global Financial Stability Report, released on April 21, it highlighted that emerging economies in particular still face tough times.

Emerging-market risks have risen the most in the past six months, said the report, while foreign capital flow into developing economies has been ”curtailed” — bad news for South Africa, which has come to rely heavily on foreign capital coming into the country to finance its account deficit.

Meanwhile, writedowns from toxic assets still mount for banks across the globe. The report estimates that ”writedowns on assets that were originated in the United States will total about $2.7-trillion, up from the roughly $2.2-trillion projected in an interim report in January”. In addition, it estimates that losses on loans and related securities originated in Europe and Japan will total another $1.3-trillion.

Chief economist at the Efficient Group, Dawie Roodt, says there are ”signs that we have stepped back from the cliff, but there is still a rough road ahead”. Nevertheless, recent events suggest a cautious glimmer of hope.

The South African Reserve Bank saw a slight improvement in its composite leading business cycle indicator, rising to 106.6 in February from 105.9 in January. But the index is still down by 14.4% year on year.

Internationally, massive rescue packages being rolled out by governments are serving to ease market jitters. These have been eased further by unexpected improvements in international banks’ performance. Citi Bank announced a surprise profit of $1.6-billion last week — its first in more than a year. The Financial Times reported a leap in mergers and acquisitions activity when 10 deals totalling more than $27-billion were announced on April 20.

The market has speculated that the takeover of mining company Rio Tinto by resources giant BHP Billiton is back on, but Billiton is steadfastly silent on the subject.

It attempted a hostile takeover of Rio last year, but pulled out of the deal because of, among other things, deteriorating economic conditions. Because of exchange rules Billiton cannot start up talks until 2010 or without very specific events taking place first, including Rio broaching talks with Billiton, another bid being made, which allows Billiton to counter-bid, or if a change of control takes place at Rio.

But if circumstances do change the deal could create one of the biggest mining houses in history.

Investment bank Merrill Lynch, in its April survey of fund managers, found that a net 26% of investors expects the global economy to improve in the next year. In addition, it found some cautious improvement in risk appetite on the part of investors, with improved sentiment regarding bank stability and continued growth in China.

The Chinese, meanwhile, are cash flush. The nation’s sovereign wealth fund, the China Investment Corporation (CIC), is on the hunt for bargains. With $200-billion to invest, according to the Wall Street Journal, the CIC is eager to enter markets such as the European Union. Resistance to Chinese investment prevented the CIC from spending large amounts of its money in the region last year, inadvertently protecting it from the financial fall-out.

But in South Africa the effects of a global slowdown are still being felt.

Stanlib economist Kevin Lings says that although indicators are that the financial crisis has abated, a similar improvement still needs to be seen in the real economy.

Key risk indicators such as the CBOE VIX index, which measures volatility in US stocks, have improved relative to where they were during the peak of the crisis, but are still not at what is considered to be ”normal” levels, says Lings.

Indicators of real economic activity, such as industrial production, international trade and consumer expenditure, continue to be poor, he says. ”We are on top of the financial crisis. We now need to move on to economic recovery.”

The world-leading US economy in particular needs to start showing signs of recovery, according to Lings. The economic stimulus package under the Obama government, which includes some tax relief for US consumers, will hopefully increase retail activity through increased consumption. This, in turn, should deplete stock levels, forcing the economy to begin producing again, relieving unemployment and improving growth, he says.

The ”single-biggest risk to recovery across all markets is unemployment”, as consumers without spending power cannot create the demand for an increase in production, says Lings. But South Africa will ”still take a while to see the bottom”. It is critical that the country sees continued interest rate cuts and the roll-out of the government’s spending on infrastructure.

Roodt says that other significant risks remain. On the international front, he says that nervous moves towards trade protectionism by countries could well erode recovery in the long term.

But locally, he says, risks to recovery are political rather than economic-policy positions. Possible threats, under a new dispensation, to institutions such as the judiciary, press freedom and private property rights will be closely watched, he says.