The Reserve Bank dropped their key repo rate by a further 1% today, led by the extremely weak economic data released 2 days ago. The repo rate is now 7.5% whilst the banks prime lending rate drops down to 11%. As most countries across the world have continued to lower interest rates during this harsh economic climate, there is suggestion that todays slashing of interest rates in South Africa could be the last cut we will see in a while. Some analysts predict that we will have one more rate cut in June and it will only be a 50 basis point drop and then from there we will not see any further cuts as the MPC (Monetary Policy Committee) would have done all it can.

We heard Maki’s views yesterday with regards to the recession in South Africa. Today it is now official that South Africa is in a recession according to the statistics released. South Africa’s real gross domestic product (GDP) dropped on a quarter-on-quarter basis by -6.4% in the first quarter of 2009, from -1.8% in the fourth quarter of 2008.This signals the first recession in 17 years for South Africa. Before the release of these figures today, analysts had predicted growth to decrease by 3.9% so considering that it came in at 6.4% was a big shock.

The global financial crisis has wreaked havoc and it appears to be the most popular subject to read about. Since everyone is talking about it daily, I might as well look at why this is such a hot topic and whether indeed SA is in a recession.

To get the technicalities out of the way; for SA to be in a recession it requires for there to be two consecutive quarters in reduction of the gross domestic product (GDP). This has not happened in 17 years until now.

In the 4th quarter of 2008, SA’s GDP dropped by 1.8%. This was the first drop in a decade. This is what brought about the alarm bells that SA may have been heading for a recession if the first quarter of 2009 showed another contraction as well.

In the 1st quarter of 2009, the SA economy is expected to contract following The Reserve Bank governor Tito Mboweni’s, comments in the past week that this would be the case. As governor, his view is held highly as he is responsible for the monetary policy in this country.

Some people blame him for his late reaction in decreasing the interest rates when the local and global economy had already started showing signs of a slow-down last year. Some economists expected for him to have been more proactive by reducing interest rates before SA was in a recession, instead of only gradually reducing rates now when the economy is officially in recession.
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The U.S. news media has convinced many investors that oil consumption is falling because of the global recession. While that may be true, it’s a disservice to millions of investors because

production is declining at a pace that’s actually three times faster.

And that suggests higher oil and gasoline prices in coming months - perhaps as much as 50% - 70% higher, or more - particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

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Vodacom finally got listed on the JSE yesterday (Monday 18 May) after doubts about the listing as investors were made to wait for a high court ruling over the weekend to be sure that the listing would occur. The trade union, COSATU, were the ones who wanted to stop Vodacom from listing on the JSE as they felt that it was not right for British company Vodafone to increase its stake in Vodacom from 50% to 60% thus giving the the British company a controlling stake in a South African company. COSATU had a valid point but Judge John Murphey dismissed COSATU’s court application.

If COSATU had gotten its way and Vodacom did not list on the JSE yesterday, that would have been a big blow to the South Africa economy as foreign investors would have been reluctant to invest in South Africa. But now that Vodacom has listed, we will see a R22.5 billion injection of foreign currency into the country from this deal. This R22.5 billion is much welcome in the economy as we have a large current account deficit.

What was interesting to note on the JSE yesterday was the Telkom share price. The share price of Telkom almost halved to R60 a share, as the market cap of Vodacom was taken out of Telkom and distributed to Telkom shareholders (along with a special dividend). The Vodacom share closed the day yesterday at R58.80 after having hovered around the R60 mark during the day. It will be interesting to keep an eye on the Vodacom share over the next couple of weeks to see how it performs.

In this my first financial article of many to come I would like to just touch on the subject of the rand and its apparent volatility as seen by many especially in recent times. I will try not delving into too much detail in terms of statistics and numbers; I am sure all that is readily available even on this website for our more numbers-orientated readers.

The first thing that springs into mind is the most obvious factor that is impacting on everyone at the moment whether personally or those close to you. That is the credit crisis. If you had not heard about that as yet, you should remove those blinkers, as it has hit home recently here in South African when the official statistics showed that SA is in its first recession in 17 years.

The credit crisis has stemmed in it a crucial ingredient called fear! People all over the world have been pulling their money from economies and institutions that they perceive to be risky following the spate of bank failures in the US linked to the subprime crisis in that country that spread like a wild fire to other European nations. Unfortunately for us, this means being in the third world country this has indirectly impacted on us also. Investors, in such trying times will move their money from risky assets and economies, and put them into perceived safe ones. What are the safe options these investors would consider?

Well treasury instruments especially the US bills and cash would be the first point of shelter in terms of protecting your capital. Therefore SA loses out on the foreign direct investments as money is taken out of the economy by investors dumping Rand shares and instruments for US treasury bills and US Dollar denominated cash deposits. With such a massive outflow one can only imagine the depreciating impact it has on the Rand.

The Rand can be seen to be a somewhat floating currency dependant to a certain degree on the free market forces making the currency even more susceptible to fluctuations especially when significant global events occur. The other risk here is the exposure to currency speculators who have many ways of gaining from a volatile currency in the same manner equity investors gain from volatile stocks. Although there are some limitations to speculative activities due to some of the exchange controls that are in place in SA, unscrupulous dealers can always find a way to circumvent these (such as use of derivative instruments).

The potential for political unrest or uncertainty definitely is something that foreign investors keep an eye on. Lets face it, a lot of investors were sceptical of Jacob Zuma’s corruption case outcome and as well as the outcome of the elections. Fear of uncertainty or drastic changes, may cause foreign investors to pull their money out of the SA economy and with it causing the depreciation of the Rand. A good example is when someone who is influential such as Trevor Manuel resigned last year, albeit for a day or two, the markets and the Rand had a mini-crash upon hearing such news. This is not just a local event, as the same would have happened when the influential and long-term serving FED’s Alan Greenspan retirement was announced in the US.

Inflation statistics actually affect the Rand as well because of purchasing power parity theorem, which shows that higher than expected inflation would cause a devaluation of a currency. This “Triple P” occurs in order to eliminate the problem of arbitrage. SA inflation has been problematic especially due to prices of food and wages which have proven to be sticky downwards. The problem with inflation is that as prices increase in rand terms, they may not be increasing at the same rate as in US dollar terms. Therefore this is what results in one currency, the rand, depreciating faster than the other (the US dollar). If this market correction did not happen, then arbitrage opportunities would exist and would be exploited until the problem has corrected itself, i.e. the Rand has depreciated.

The rand quite recently has been strengthening and this is mainly attributable to the improving global sentiments. Investors are becoming more confident that the steps taken by the US and European countries to stem the global financial rot is working. This bodes well for us in third world countries since confident investors, means more risk appetite and these investors start to move their capital back into SA stocks and other third world economies, causing currencies such as the Rand to strengthen. The general trend seen at present is the US stocks recovering now and this feeds into the SA markets and the Rand. It also helps that the South African big four banks have survived well through these trying times without any need for bailouts. This once again sends positive signals to the foreign investors that South Africa does not have the same financial rot as the western countries, and brings in confidence for investments propping up the Rand.

However, trying to guess what the Rand does next is something that I doubt anyone can do precisely. The best approach in my view is considering the factors that mainly affect this currency and trying to forecast how these factors will play out in the future to reach a conclusion where the Rand will be in the upcoming months or years. But the only problem is that some of these factors are unpredictable, therefore your guess is as good as mine! Have a good day.

Maki

South Africa’s new president, Jacob Zuma announced his new cabinet yesterday (Sunday) and there were a few surprises. One big question was if Trevor Manuel would remain as the minister of finance but it was not meant to be. Zuma has decided to go with Pravin Gordhan as the new minister of finance in South Africa. Gordhan headed the South African Revenue Service (SARS), SA’s tax authority. Under his leadership, SARS received great admiration for steadily raising income.

Gordhan’s appointment signals the end of Trevor Manuel’s 13 year reign as the minister of finance, making him the world’s longest-serving finance minister. Under Manuel, the South African economy did well as investors approved of the tight monetary and fiscal policies he kept in place.

But Manuel will not be totally out of the picture, he will still remain part of the South Africa government. Manuel will take up a role to head a powerful new planning body in the South Africa government. It will be interesting to see how the markets and investors react to the appointment of Gordhan now that their ‘darling’ Manuel is no longer in the top finance position. There should not be much reaction as Gordhan is expected to do well in his new position. And with Manuel still being part of the picture, we do not expect much changes in the economic policies.