Why SA rates can't be cut

[BBSA]

Interesting article from Moneyweb:

After interest rate cuts for dozens of countries around the world were announced during the week, Tito Mboweni, governor of the Reserve Bank, announced on Thursday that the domestic rate would be held. Mboweni's official statement was a masterpiece of disguise, not unlike photographs of him before he banned stills cameras not under his control, a few months back.

Mboweni owes it to South Africa to explain why the Bank simply cannot cut interest rates, in line with the globally co-ordinated central bank packages that continue to unfold, in an effort to restore stability to disemboweled world credit markets. On Thursday, Mboweni made the strange observation that "the exchange rate of the rand has been negatively affected by increased global risk aversion, resulting in higher volatility and a significant depreciation".

Translating this gobbledygook into vanilla English is no big deal. The rand is one of the worst performing currencies in the world against the dollar, along with the Pakistani rupee, Australian dollar, Colombian peso, Brazilian real, and Korean won. Each has lost around 30% of its value against the dollar within the past 12 months.

The reasons are as idiosyncratic as each country. South Africa's economic and political indicators are wobbling, and looking to start stumbling, amid the ANC's power drunk personality carnival, where "service" to the nation remains a foreign concept. Beneath that, South Africa has the highest unemployment rate of nearly 60 countries listed by The Economist magazine. South Africa's jobless percentage is so bad that it's more than twice as big as that in the country in number two position.

Seen alongside other emerging countries, South Africa's economic growth rate is modest, despite a commodities supercycle that's endured for six years. The cycle peaked and spectacularly blew off in mid-July 2008, something that's now severely hurting the country's dollar export receipts. If this were not enough, South Africa labours under one of the highest inflation rates in the world, driven mainly by horrifying pay hikes persistently granted to increasingly unproductive government employees, and structural inflation like the mind-blowing increases in Eskom's electricity tariffs.

For lovers of the macabre, South Africa also boasts, relative to the size of its economy, one of the highest trade deficits in the world. Trade deficits accumulate when imports exceed exports; here, it follows years of profligate ghetto blaster consumerism encouraged by cheap-credit, rather than importing of capital items that can be used in productive processes.

A increasingly widening trade deficit undermines South Africa's ability to accumulate foreign reserves, which stood at just $31bn, at latest count, compared to (say) $1,8trn held by China, $170bn held by tiny Singapore, $583bn held by Russia, and so on. Trade deficits, combined with puny foreign reserves, leave a country with little choice but to perform somersaults, and other awkward things, to attract foreign cash inflows.

To this end, South African interest rates are among the highest in the world. This attracts so-called carry trades, where some foreign investors borrow in jurisdictions with low interest rates, and look to turn a quick buck here. This flow process is also known as hot money, given high mobility and its owner's ruthless dedication to heartless profits.

There is a secondary flow here, in the form of foreign investment into listed shares on the Johannesburg bourse. For the year to date, net foreign buying of stocks on the JSE Securities Exchange is negative to the tune of R24bn, compared to a net positive inflow of R60bn for the same period in 2007, a swing of R84bn. If anything, South Africa will need to increase interest rates, going forward, forcing the country as a whole to subsidise returns for foreign investors.

 

[Kokop]

Great article, sums us up quite well.

Does not delve into the liquidity crisis that will also hurt us even more as "hot" money dries up worldwide.

 

[fritzdeelman]

...but will this strategy not improve our liquidity - higher interest rate here would mean more so called hot money flowing to our shores?

Frankly this economics business is difficult to understand. This current crisis was precipitated by bad loans, now they cut interest rates? Which would lead to more bad loans???? I don't feel to bad about my lack of understanding though because evidently these so called economists did not understand the situation well enough to be able to predict this meltdown on the stock markets.

 

[Generator Man]

Great article, sums us up quite well.

Does not delve into the liquidity crisis that will also hurt us even more as "hot" money dries up worldwide.

+1.

However, you still get a sector of our population that maintains it's poppycock, and that our economy is blooming, and that we are immune to all that happens around the world due to the massive skill of Mboweni's policies.

Head in sand and all that

 

[mic_y]

+1.

However, you still get a sector of our population that maintains it's poppycock, and that our economy is blooming, and that we are immune to all that happens around the world due to the massive skill of Mboweni's policies.

Head in sand and all that

Reminds me of Russia in a way:

First there is a report from the stock market, saying that stocks fell 20% in one day, then, not 2 minutes later, you have Putin meeting some banking big-shot, saying that Russia is well protected from the problems of the world... like WTF, 20% in a couple of hours of trades, well protected...

 

[.geek]

Nice article, but please post a link to the original. It's nice reading the comments.

 

[.geek]

http://www.moneyweb.co.za/mw/view/mw/en/page84?oid=229806&sn=Detail

 

[noxibox]

...but will this strategy not improve our liquidity - higher interest rate here would mean more so called hot money flowing to our shores?

And at the same time cripple our already hobbled local economy.

Frankly this economics business is difficult to understand. This current crisis was precipitated by bad loans, now they cut interest rates? Which would lead to more bad loans????

The problem is giving loans to people with a poor credit history and who are therefore unlikely to be able to repay.

 

[vxv]

Nice article thanks.

Seriously concerned about the lack of local production stimulation with the imports and the “hot money” issue.

The bad thing about the foreign investments is the lack of long-term confidence to actually invest in our infrastructure and production potential. Well that is the nature and ease of this investment model. Quite ironic though this is the reason the US is so confused...Too much money moving without tangible investment and confidence of actual value.

Will we not follow the same path if we focus on the quick buck?

I have an idea, let’s stop imports (At least those that we can manufacture locally). We can get those countries interested to come here and make it with our people.

I can’t help to think it’s a good thing for a government (majority party) to own the banks and mortgages. Imagine Marxism in full force.

Default that bank payments and we sell your house for free market distribution to previously disadvantaged groups = streamlining RDP.

…that ring in my ear again.

 

[Albereth]

This current crisis was precipitated by bad loans, now they cut interest rates? Which would lead to more bad loans????

The idea is if you cut interest rates the people with the existing loan will be able to service their loans and, hence, reduce the number of defaulters.

The other benefit of reducing interest rates it to raise the economic activity, even at the expense of creating more debt. The monetary system needs the money to 'flow'. If the economy is stagnant it means that no one is buying and that no one is selling.

 

[Albereth]

I have an idea, let’s stop imports (At least those that we can manufacture locally). We can get those countries interested to come here and make it with our people.

How about a better idea - all those countries that owe us offset allowances for the arms deal - send us capital equipment and the instruction books.

Trouble is that if we automate and become more efficient we'll end up with even more unemployment.

 

[Albereth]

+1.

However, you still get a sector of our population that maintains it's poppycock, and that our economy is blooming, and that we are immune to all that happens around the world due to the massive skill of Mboweni's policies.

Head in sand and all that

Precisely. I think Chris Gibbons summed it up this morning - if the USA isn't buying then nobody else is selling.

 

[vxv]

The monetary system needs the money to 'flow'. If the economy is stagnant it means that no one is buying and that no one is selling.

Is that a bad thing? If the product is actually worth something, someone will always want it.

 

[vxv]

How about a better idea - all those countries that owe us offset allowances for the arms deal - send us capital equipment and the instruction books.

Trouble is that if we automate and become more efficient we'll end up with even more unemployment.

Well we can use our own skill and production to then build and export our own.

If everyone contributed with equal gain there would be no "unemployment".

 

[Albereth]

Is that a bad thing? If the product is actually worth something, someone will always want it.

Wanting it and being able to pay for it are not the same thing

 

[Albereth]

If everyone contributed with equal gain there would be no "unemployment".

Not sure what you mean here.

And if it is going where I think it might be going, no, communism does not work except on a very, very small scale.

 

[supersunbird]

I have an idea, let’s stop imports (At least those that we can manufacture locally). We can get those countries interested to come here and make it with our people.

Soooo, you will be the first to buy the crappy locally made TV that makes a Diamond TV look like a very good durable TV instead of a nice Samsung or Sony?

 

[vxv]

Precisely. I think Chris Gibbons summed it up this morning - if the USA isn't buying then nobody else is selling.

I think the US is "fat" enough. They need to stop buying and chinese need to stop their cheap slave labour.

 

[vxv]

Soooo, you will be the first to buy the crappy locally made TV that makes a Diamond TV look like a very good durable TV instead of a nice Samsung or Sony?

LOL. If we can make local TV's, but TV is a dying technology. Internet is the way to go and I don’t even have a TV. Watch all my shows online or download them.

I agree the learning curve will be steep but at least we will have a learning curve.

 

[Albereth]

I think the US is "fat" enough. They need to stop buying and chinese need to stop their cheap slave labour.

Umm, you not quite getting this are you?

If the USA stops buying then the Chinese will stop making. Basically the USA is the dominant consumer market and most of the world is reliant on that. Wishing that it were otherwise doesn't make it so.