South Africa's Fitch rating outlook and global woes: Analytics

Lance Vogle of Analytics comments on the response to our Fitch downgrade and the short lived euphoria over the Obama victory, due to continuing sub-prime woes.

Fitch outlook revision
The global Fitch Rating Agency announced earlier this week that it had revised its outlook for SA's sovereign credit rating (currently BBB+) from stable to negative. Although this is only an outlook revision, it does reflect negatively on the credit standing of the government, and financial shares on the JSE moved sharply down following the announcement. Fitch stated that emerging market capital outflows would make it harder for SA to finance its current account deficit. In addition, Fitch also highlighted concern about SA's political transition next year, saying that "in the event of a recession the political commitment to the current economic framework could be tested".

This news from Fitch was immediately dismissed by National Treasury, with director-general Lesetja Kganyago saying he was confident that the new ANC leaders would keep their pledges to stick to the prudent economic policies that have won SA credibility in global markets in the past 14 years.

Kganyago reminded us that President Kgalema Motlanthe and ANC leader Jacob Zuma have gone out of their way to reassure markets that SA's economic policy cornerstones will stay in place. He went on to say that SA had not yet had problems financing its current account deficit.

A decision last week by UK mobile operator Vodafone to buy another 15% stake in Telkom was both a capital inflow and a sign of confidence in the economy, despite the global turbulence. If SA did run into problems it would access a credit facility set up last month by the International Monetary Fund to help emerging economies with a strong track record deal with the crisis. Finance Minister Trevor Manuel delivered his Medium Term Budget Policy Statement on 21 October.

In a "no surprises" budget there were no significant changes to fiscal policy and inflation targeting was further endorsed. There was also no evidence of influence of any populist policy moves.  The Minister took the opportunity to highlight South Africa's many positive macro-economic conditions relative to many other countries, especially the soundness of the banking sector.

He also stressed that the government was planning to increase expenditure at a time when private sector growth is under pressure. Government has already offered Eskom a R60 billion loan, and the electricity utility is already in talks with the World Bank for a $5 billion loan as well.   

The Reserve Bank mentioned last week that slowing global growth and lower commodity prices suggested that inflation pressures were waning, although the turmoil in the financial markets would complicate interest rates decisions for some time to come. SA's subdued household spending and the widening gap between economic potential and actual output also suggested that price pressures were easing.

But the weaker rand which, was affected by global volatility just like other emerging market currencies, posed a significant new inflation risk. This weaker rand risk is intensified by our large current account deficit and the fact that the deficit will not be reduced any time soon. The Bank repeated the inflation forecasts unveiled at its monetary policy meeting a month ago when it kept the repo rate steady at 12%. Inflation would fall "significantly" at the start of next year and return to the 3% to 6% official target range in the second quarter of 2010.

The SA political landscape has unfolded further with the formal breakaway from the ANC of a (large) group of disgruntled cadres who have established a new political party to be called the Congress of the People (CoP). Just across our borders, Robert Mugabe runs ever-widening rings around growing numbers of politicians as he grimly clings to power in Zimbabwe.

Our equity market continues to be extremely volatile and skittish and is swayed rapidly either way by any good news or bad news at the moment. Until some element of rationality returns, we will remain on the sidelines before committing any cash to risky assets classes even though those asset classes offer longer term fundamental value.    

Global Market woes continue

The euphoria of the US election victory for Barack Obama was short-lived last week as the fallout from the US sub-prime housing mess continued. Obama, who swept to a historic White House victory, now faces the task of trying to lead the world out of its worst financial crisis since the 1930s. American Insurance Group (AIG), which was bailed out by the US government, received an extended financial package on Monday, valued at more than $150 billion. The insurer booked $7.05 billion in write-downs during the third quarter on the value of credit default swaps (guarantees AIG sold to protect fixed income investors) and marked down other holdings by $18.3 billion, before taxes. The support that AIG is receiving is based on the US Federal Reserve's conclusion that the insurer's failure would "add to already significant levels of financial market fragility".

US vehicle manufacturers that are burning through cash as a result of tumbling sales have also approached the Federal Reserve for an aid package to help save them from collapse. General Motors, the biggest US vehicle manufacturer, has said that it would run out of operating cash this year sending its shares down by 22% on Monday after Deutsche Bank cut the GM share price target to zero! US vehicle sales plunged last month for the 12^th month running, the longest streak in 17 years, overwhelming efforts by GM, Chrysler and Ford to cut costs by trimming payrolls and shutting factories. A GM bankruptcy would cost about 2.5 million jobs in the first year among vehicle manufacturers.  

Across the Atlantic, central banks continue to pump money into the financial system and interest rates were lowered again. Last week, the UK rate was cut by an unexpectedly large 1.50% while the European Central Bank cut EU rates by 0.50%. Farther east, Beijing announced last Sunday a $586 billion stimulus plan for the Chinese economy. The plan calls for spending on roads, airports and other infrastructure, tax deductions for exporters and bigger subsidies for the poor and for farmers. Spending on health and education will be increased as well as spending more on environmental protection and high technology. China's announcement came as economic officials from the Group of 20 (G20) leading economies, which include major wealthy and developing states, called on Sunday for increased government spending to boost the troubled global economy.

On November 15 the finance ministers and central bankers of the G20 group of countries will meet again for further discussions on the ongoing global financial crisis. However, initial optimism over the AIG plan and China's $586 billion stimulus package collapsed quickly in the face of dismal U.S. company news including layoffs, a major bankruptcy filing, the agony of the once-mighty U.S. auto industry and a record $29 billion quarterly loss by mortgage giant Fannie Mae. Economists see the U.S. economy headed for a recession that will be deeper and last longer than those of 2001 and 1990-1991 according to the monthly Blue Chip Economic Indicators, a closely watched survey of economists. "Some of our panelists believe it may (rival) the 1981-1982 downturn. ... job losses seem destined to remain sizable over coming months as the recession continues to take its toll," the newsletter said.

While uncertainty prevails around the ultimate effectiveness of concerted global efforts to save ailing economies, equity markets will stay firmly entrenched in their current technical bear trends.