EDITORIAL: Bonds not good news for ANC
The bond markets are looking for concrete actions to arrest SA's economic malaise
The idea of a currency being equivalent to a country’s stock price is perhaps too simplistic. Many factors determine movements in currencies and it doesn’t always follow that an outperforming economy should necessarily mean that the currency does the same.
Take Japan: in good times, the opposite often happens, as good news on the economic front gives consumers and companies the confidence to search for higher-yielding assets elsewhere instead of parking their cash in the bond market and its negative returns, which is what they do when they feel less confident.
So it wouldn’t be completely useful to take the rand’s recent weakness, which pushed it to its lowest level against the dollar in a month on Tuesday, and conclude at face value it’s a sign that foreign investors have lost all confidence in SA. It’s also not happening in isolation. Of the 31 currencies tracked by Bloomberg, only one, Israel’s shekel, had gained against the dollar in the five days to Tuesday. And even that gain was small, at less than 0.5%.
So recent weeks have been about dollar strength, owing to the economy’s relative strength when many are flirting with recession, prompting central banks to embark on aggressive easing.
While the US Federal Reserve has cut rates, that has been dwarfed by more aggressive policies elsewhere, such as the European Central Bank’s decision to cut its deposit rate further below zero and resume money printing via quantitative easing.
Australia is the latest country to have cut rates, with the central bank indicating that more easing could come, a signal for traders to sell the Australian version of the dollar. The US dollar is trading at its strongest levels against the euro since the middle of 2017. So on this score we should not feel too lonely.
MARKETS ARE LOOKING FOR THE CONCRETE ACTION NEEDED TO CURE SA’S ECONOMIC MALAISE
Before they get too cocky, it would be good for the ANC leaders locked in a national executive committee meeting since the weekend to remember this is where the good news ends.
While it’s true that the rand’s weakness has been part of a broader trend of a sell-off in emerging markets, it has had particular features that indicate idiosyncratic drivers.
For one thing, the almost 3% weekly decline in the past week is almost a full percentage point more than that suffered by the second-worst performing emerging-market currency, the Turkish lira, which is down just under 2% in the same period.
Perhaps the better place to look to gauge foreign-investor sentiment towards SA is in the bond market. With its immediate effect on the government’s cost of borrowing, and therefore everybody else, bonds give a much more accurate indication of what potential investors make of a country’s financial health. And for SA, the signs are not good. Data from the Treasury show that the proportion of SA sovereign debt held by foreigners dropped at the end of September to 36.9%, down from 37.3% in August.
When Cyril Ramaphosa became president of the ANC in December 2017, the figure was 41%. By March 2018, the month after he took leadership of the country, that had grown to 42.8%. That unfortunately was as good as it got, as a sluggish economy, the crisis at Eskom and a steady deterioration in government finances diminished Ramaphoria.
So as the ANC concludes its meeting, it should note that the world is watching. And if the bond markets are a proxy, they don’t like what they are seeing and they are voting with their cash. Instead of the wrangling we’ve seen and attempts to appease Cosatu, which are bound to fail anyway, they are looking for the concrete action needed to cure the country’s economic malaise.
Most observers agree that finance minister Tito Mboweni’s growth strategy is a good start. In the absence of something better from its detractors, Ramaphosa needs to stand up and start implementing it.
Start with the easy ones — such as immigration, which should have been implemented years ago.
SA needs to change the subject about its prospects.