Last year Morgan Stanley coined the phrase the “Fragile Five,” lumping South Africa together with India, Brazil, Indonesia and Turkey as being the countries that were most at risk when the Federal Reserve started tapering off its Quantitative Easing programme (which in the Central Banking for Dummies handbook means ‘buy more debt to solve an insurmountable debt problem’). But is it fair for South Africa to be lumped together with these other economies as being susceptible to a flight of foreign capital when the injection of cheap money inevitably comes to an end? Finance Minister Pravin Gordhan did not seem to think so, saying it was “regrettable and shortsighted”. But the danger flag was undeniable – a Twin Deficit that had mushroomed alarmingly since the turn of the century. The chart shows a history of the current account (what the country receives from trade of goods, services and investments offshore, less what it spends) as well as the fiscal (budget) account (what the government earns in taxes, less what it spends), both reflected as a percentage of GDP. As you can clearly see, in 2000 there was a zero combined deficit, but since then the situation has steadily deteriorated to the point where 2013 recorded a combined deficit of 11% of GDP! And the problem with that? Well, if you spend 11% more than you earn, you need to borrow to make up the shortfall. Fortunately, because of low interest rates overseas, foreigners have been happy to bring their money into our markets (to earn a premium return). Problem is – just as quickly and easily as this money has come in, it can and will go out at the first sign of a potential loss of capital. And unfortunately, that is exactly what has happened, with foreigners being net sellers in both the bond and stock markets for 2013. And the net result – a rand depreciation of 24% for the year. Having twin deficits is serious enough, but reliance on (and encouragement of) shortterm capital flows to shore up these long-term shortfalls is probably as close to ‘regrettable and short-sighted’ as you will get. For more information on the rand go to www. ForexForecasts.co.za/go/ ZAROutlook. CAPTION James Paynter is the head market analyst at Dynamic Outcomes
