South Africa to be victim or beneficiary?

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By Cees Bruggemans, Chief Economist of FNB.

A news item drew my attention. Citigroup Global Chief Economist Willem Buiter opinioned that “the euro zone turmoil may be the ‘opening act’ of a global sovereign debt crisis that could soon infect the US and Japan”.

Willem has aired such views before, seeing the wood for the trees. George Soros, and quite a few other global ‘names’, possibly hold similar views.

And the question that fascinates most: What’s in it for us? Will it be hellish? And in what way? For there are quite diverse varieties of purgatory.


A small sovereign debt crisis is one thing. A global sovereign debt crisis is something else.

When many large regions are drawn into a spectacle like this, it tends to reflect deep seated structural fault lines begging for adjustment, with financial markets as the dung beetles of the piece.

Such big scale adjustment tends to see much upheaval, much uncertainty, much anxiety, for money is at issue.

As a small open emerging commodity producer WITH attitude we are terribly exposed to an adverse change in global risk appetite.

As a global financial crisis erupts, whether focused on equities (1987), currencies (Asia 1998, UK 1992, Europe 1970s), commodities (1974, 1979), bonds (1982, 2010) or banks (2008), capital has a way of withdrawing to the sidelines, into so-called safe havens, wanting to outwait the storm.

But if that means the draining away of tens of billions of Rands from our financial markets (‘sudden capital flow reversal’), it would mean the Rand could plunge.

On a twelve month view our inflation could rise shock-like. And the SARB could enter policy tightening mode, matching the Rand income and inflation effects in a balanced way, trying to maintain stability.


But South Africa also happens to be the premier precious metal producer in the world, counting gold and platinum.

And that puts a different complexion on us. We are somehow ‘different’ from Aussie, Brazil, Canada, Russia, the whole gang. For we are basically a glowworm, lighting up in truly desperate global financial crises.

It happened during the 1970s, when international policy malfunctioning, currency upheaval, oil price mayhem and inflation shocks rattled the sensibilities of global investors deeply, inviting them to seek safe havens. One of the few available in that decade was precious metals.

South Africa was the ONLY non-oil producing country in the world that did exceedingly well out of two global oil crises that decade, and the preceding Dollar crisis, seeing the gold price rise 24-fold.

But today we don’t have global inflation?

Yeah, but we do have malfunctioning rich economies, deep policy adventurism in at least the Anglo-Saxon world, deep misalignments in Europe not close to resolution, a recalcitrant China hogging mercantilism, with a whole brood of little Asian mercantilists in tow, and the outline of global currency upheaval.

And into that lively pot, Willem seems to be saying, we could shortly see a major global sovereign bond crisis erupting as investors walk away faster and faster from such investments, causing long yields to rise, threatening economies yet more, inviting central banks to become even more adventuresome, and investors yet more desperate for safety.


Don’t want to belabour the point too often, but those conditions sound even more wonderful than the 1970s when gold added a zero and then nearly tripled, peaking at $850. That was a thrill without equal.

Admittedly from undervalued levels ($35) after three decades of having been pinned down artificially while inflation rose, but it was still quite a shift.

Source: Cees Bruggemens, FNB, December 2, 2010.

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