Foreign Flows Important to Balance the Books

 EmailPrint This Post Print This Post

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.

19-nov-4.jpg

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.

19-nov-5d.jpg

 

19-nov-6c.jpg

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.

 

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

 

OverSeas Radio Network

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

Feed the Bull