US shutdown gives SA a breather

No entry: As shutdown ensues, fears over the US debt ceiling emerge, but the start of quantitative easing tapering looms less large. (Jason Reed/Reuters)

No entry: As shutdown ensues, fears over the US debt ceiling emerge, but the start of quantitative easing tapering looms less large. (Jason Reed/Reuters)

The world's leading economy, the United States, is sailing ever closer to hitting its debt ceiling, set at October 17, as the federal government this week ground to a partial shutdown for the first time in almost two decades.

The shutdown will see an estimated 700 000 to 800 000 civil servants go home without pay, and only essential personnel remain on the job.

The shutdown is expected to do limited damage to the US economy, provided it is not protracted.

However, if the politicians cannot reach an agreement that will allow the country's debt limit to be increased, the impact will be far more severe.

The debt ceiling or limit is the maximum amount of money that the US may borrow to meet its financial obligations, and failure to increase it could cause "catastrophic economic consequences", according to the US treasury.

The limit is currently $16.7-trillion but, without an increase, the US risks defaulting on its debt, which would have wide-ranging financial consequences.

"Final extraordinary measures"
On Tuesday, the secretary of the treasury, Jacob Lew, wrote to inform Congress that it had begun "final extraordinary measures" to pay the nation's bills.

"It is important to note that, once the final extraordinary measures are exhausted, no later than October 17, we will be left to meet our country's commitments at that time with only approximately $30-billion," Lew wrote in a letter posted on the US treasury website.

"This amount would be far short of net expenditures on certain days, which can be as high as $60-billion."

The shutdown was triggered after the Republican-led House of Representatives failed to pass a budget Bill unless a new healthcare law, widely know as "Obamacare", was delayed by a year — a condition the Democrats rejected.

A similar standoff took place in 2011, with the politicians coming to an 11th-hour agreement, averting a debt default, but not before the country's credit rating was downgraded by ratings agency Standard & Poor's.

The shutdown, and current uncertainty over the country's ability to address the debt ceiling, however, could offer South Africa and other emerging markets further respite from the threat of the US Federal Reserve tightening monetary policy, according to local economists.

Delays on Feds' QE
The longer the federal government shutdown lasts, the more likely there could be delays to the Fed's quantitative easing (QE) programme, Investec economist Annabel Bishop said this week.

Quantitative easing is the weekly purchase of $85-billion in government debt and mortgage-backed securities by the Fed, which, with zero interest rates, is aimed at increasing liquidity and boosting the US's economic recovery.

This ultra-loose monetary policy has seen large capital flows into emerging economies, helping South Africa finance its twin fiscal and current account deficits.

But it has left the country vulnerable to the reversal of these money flows as investor sentiment shifts with perceptions of risk.

The Fed surprised markets in September when it announced it planned to continue the pace of asset purchases amidst expectations these would be gradually reduced.

It said it would hold off until it was certain of improved economic data.

A "clean bill"
Bishop said the shutdown is unlikely to last until the October 17 deadline because an agreement has to be reached on the debt ceiling.

A "clean bill" not tied to hindering affordable healthcare roll-out is expected to be presented to the Senate before that happens, she said.

But if that did not occur, the shutdown will grow "more severe", "shaving further growth off the economy".

Uncertainty over the debt-ceiling issues will have some short-term effects, Paolo Senatore, Ashburton Investments' chief investment officer for South Africa said, noting that the rand has strengthened off the back of the dollar's weakness early this week.

But history has shown that a solution is likely to be found, he said.

The rand faces greater headwinds in the coming months, Senatore said, the most important of which was the eventual advent of QE tapering.

Ratings agencies Moody's and Fitch warned in separate reports this week that countries with large budget and current account deficits are most vulnerable to the effects of tapering.

In its report, Moody's stated that developing countries that are receiving significant amounts of capital inflows, particularly portfolio flows, "are especially vulnerable to capital flow reversals".

Meanwhile, Fitch estimated that roughly 30% of South Africa's current account deficit is funded by capital inflows.

There is little South African authorities and policymakers can do to guard against the effects of tapering, Senatore said.

"It may be that South Africa just has to ride [it] out."

There is a risk that, if a QE pull-back takes place and US economic growth falters, QE could be stepped up again, he said.

Greater market volatility
This would create greater market volatility. QE has stimulated the US economy, he said.

"The question of whether it [the economy] can run on its own two feet is a question that has not been answered," Senatore said.

The political battles playing out in the US and their impact on monetary policy is evidence of major changes to the rules of monetary policy, the chief economist of the Efficient Group, Dawie Roodt, said.

Roodt pointed out that the Fed had highlighted ongoing fiscal constraints in the US, in its decision not to start tapering.

"The Fed acted in anticipation of this political nonsense," said Roodt.

It has been heavily criticised for QE, he said, which is essentially a monetary policy experiment.

Unorthodox policy 'becomes mainstream'
Recent developments indicate that this unorthodox policy is now "becoming mainstream".

"Monetary policy rules are changing very rapidly. Central banks are now in charge of the markets and markets are acting on policy decisions not on macroeconomic fundamentals," he said.

There are ways to begin insulating South Africa from the effects of an eventual QE reduction, according to Chris Hart, the chief investment strategist at Investment Solutions.

South Africa has to increase its competitiveness as an investment destination, thereby attracting capital flows, but it also has to build up domestic savings to reduce reliance on foreign capital flows to finance our fiscal and current account deficits.

Inappropriate taxes that hurt domestic savers such as tax on interest and dividends, transfer duties on homes and capital gains tax all discourage savings, he said.

A build-up of savings in households is also how many small businesses are funded.

More small and medium enterprises will also generate more jobs, helping to address South Africa's chronic unemployment problems.


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