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| A LARGE DEFICIT [boodskap #113615] |
Di, 27 Maart 2007 06:17 |
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Kom ons sien of Mbweni die ding gaan reg maak.
Trader vic is dood reg met sy analise van die SA CAD.
Hou lager Mbweni wag , hou harder gaan ons val
Till 'def' do us part
27/03/2007 08:01
By: Vic de Klerk
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South Africans spend more
Dire need for savings culture
Lesson for SA is to save more
C/A deficit a blow for rates
C/A deficit swells to 7.8%
Shock and horror
A LARGE DEFICIT on the current account of the balance of payments in
the past always worried me as an investor in listed shares. There was
too close a correlation between the direction of the deficit and the
price: earnings multiple at which the shares were trading.
Even just the turnaround of a surplus on the current account to a
deficit in the past caused a fall in the p:e at which shares were
trading. Of course, the fall of a p:e means that share prices fall.
South Africa not only has a large deficit on the current account of
its balance of payments but in the fourth quarter of 2006 the country
also had a huge, unhealthy, structurally dangerous, unprecedented -
and call it other names if you like - deficit of an annualised R143bn,
or 7.8% of SA's gross domestic product.
In the past, especially when we were still isolated from the rest of
the world's money markets, a 3% deficit on the GDP made me so nervous
that I exchanged the broking industry for farming.
Bull market of '69
That fear of a current account deficit dates from 1969. For those who
don't remember: between 1964 and 1969, SA experienced a huge bull
market in the prices of industrial shares. During the course of that
bull market the then Rand Daily Mail's index for industrial shares -
the JSE didn't have its own index yet - rose by nearly 400%.
One of my first duties when I entered the Johannesburg financial world
in 1969 was to keep a weekly graph of SA's foreign exchange reserves
up to date - by hand. Yes, at that time SA's gross foreign exchange
reserves were announced weekly.
For years the graph, with crosses for increases and circles for falls,
just went up and down in line with the share prices. The reserves rose
mainly because SA had a surplus on its current account.
There wasn't much of an inflow of foreign capital in those days.
Sharpeville was still vivid in people's memories; in any case, SA had
strict foreign exchange control on foreign investors.
The big drop
Then suddenly - from May 1969, and especially June and July of that
year - the weekly graph showed more falls than rises in our forex
reserves. Then, without understanding the contexts properly, I
overheard discussions on the floor - which were shared by the
investment analysts, portfolio managers, traders and our small
economics division on one side - that share prices were no longer
rising. In fact, they began falling.
The reserves fell further, followed by further falls in share prices.
But the faces, especially of the management of our merchant bank, fell
the furthest of all. It was clear that most of them were insolvent, as
the merchant bank's share price fell too far below the price at which
they were obliged to take up options.
That was around 1970, 1971. The reserves still fell, because SA had a
current account deficit. In fact, things only began improving from the
middle of 1976 when the gold price started climbing slowly.
In the following years my colleagues at the then PLJ Financial
Services, now Thebe Securities, and I carefully followed the country's
current account surplus as an important medium-term indicator of what
could be expected of the share prices.
But just as with any good indicator that suddenly no longer works you
quickly forget your good habits.
Investment vs saving
Our current account surplus disappeared back in the second quarter of
2003 and became a deficit. That coincides almost exactly with the
start of the current strong bull market in shares. Luckily, over the
past few years my former colleague Lafras van Rensburg, who is still
with Thebe, and I completely forgot about our fears concerning a
current account deficit.
Nevertheless, it's something that keeps sticking in the back of my
mind - even though (Reserve Bank governor) Tito Mboweni assures us
regularly that the inflow of capital and the level of reserves are
quite sufficient to cover the present current account deficit.
The student who wonders why there's a correlation between the current
account deficit and share prices would be well advised to take a look
at the latest SA Reserve Bank Quarterly Bulletin. The table on page S
124, which deals with the financing of gross capital formation, shows
that SA's gross capital formation was R350bn last year. However, the
country's gross savings were only R239bn.
Investment therefore exceeded savings by R111bn - exactly equal to our
balance of payments current account deficit for that full year. In
2006, that deficit was comfortably covered by the inflow of all kinds
of capital.
Pain of rising rates
My longstanding fear of a current account deficit and its effect on
share prices rests on the simple supply-and-demand principle.
Investment can't exceed savings forever, especially not at 7.8% of
GDP.
Savings - specifically, personal savings - just have to increase from
the current negative levels. That can only happen if personal spending
is lowered. And for that drastic measures are required, such as a
significant increase in interest rates.
Trader Vic asked Mboweni as far back as April of last year for a two-
percentage point increase in the repo rate. So far, we've had two
little steps of 0.5 percentage points each.
The time has come for a full percentage point increase in the cost of
credit. It's now necessary for the new class of consumer who has only
recently discovered the wonderful pleasure of plentiful credit - and
also the rest of the interest cycle - to learn about the pain of
rising interest rates.
http://www.fin24.co.za/articles/default/display_article.aspx ?Nav=ns&ArticleID=1518-1522-2012_2089675
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