Foreign Flows Important to Balance the Books

By Prieur du Plessis, on November 19th, 2008 posted in: South Africa

The global credit crisis has moved South Africa’s dependency on global capital flows to centre stage, especially as the country’s risk rating has been downgraded by three of the world’s four large credit-rating agencies. Given South Africa’s high current account deficit, this news is cause for concern.

The current account deficit has so far been financed by foreign portfolio flows, but these are notoriously fickle and this year has already seen net outflows of R53 billion and R0.4 billion from equity and bond investments respectively. A turnaround in this situation should not be expected before the global credit situation calms down and investors develop a renewed appetite for risk.

Sound economic policy is one of the reasons why South Africa has been able to weather the global credit crisis reasonably well thus far. However, one of the main reasons why the rating agencies are becoming cautious about South Africa is the fear that Jacob Zuma’s ANC could yield to pressure and adopt policies harming investor confidence.

Any further downgrade in South Africa’s rating and/or meltdown of the global financial situation could have a significant impact on the flow of foreign capital. Without that capital the current account deficit could increase so sharply that the value of the rand would be under severe pressure. This, in turn, could have a detrimental effect on inflation and ultimately interest rates. The reintroduction of prescribed assets for retirement and other funds (i.e. forcing institutions to hold minimum percentages in certain debt obligations) would also not be far off in such a scenario.

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