Hot money goes cold

gill marcus Hot money goes cold

Federal Reserve signals an end to quantitative easing and SA’s fragile economy could be badly exposed

The South African economy and other emerging markets were hit hard this week by a historic global sell-off after four years of being relatively insulated from the global financial crisis of 2008.

Federal Reserve chairman Ben Bernanke on Wednesday signalled that the age of so-called quantitative easing (QE) is almost over.

Economists are still arguing over whether QE will start tapering off in September or October, but barring any devastating new developments in the US economy, the programme will end next year.

The US will cease its programme of buying several billion dollars’ worth of its own bonds per month, closing the tap on the “hot money” that has buoyed capital markets and stock exchanges all over the world.

Currently, the Fed is buying bonds worth $85 billion (R867 billion) a month. A fundamental failing of the programme has been that much of the money it pumps into the financial system floods out to the rest of the world, where higher yields are possible, dampening the actual positive impact on the US.

The announcement by Bernanke unleashed a global blood bath on stock exchanges and bond markets that are supported by QE money.

traders Hot money goes cold

Traders on the floor of the New York Stock Exchange this week. After a speech by Federal Reserve chairman Ben Bernanke on ending so-called quantitative easing, the JSE closed substantially lower || Photo: Brendan McDermid/Reuters

Finance Minister Pravin Gordhan had on Tuesday called on Bernanke to ensure “minimal damage” when he emerged from a two-day meeting of the Federal Reserve’s Open Market Committee to make his statement on the future of QE.

The rand is particularly vulnerable to the fallout, as it is widely traded.

Standard Bank this week predicted the currency may fall lower than 10.36 to the dollar, while John Cairns, a currency strategist at Rand Merchant Bank, said “risks of further multimonth rand weakness have increased”.

According to Bloomberg, there was a global series of flopped bond auctions this week.

Romania rejected all bids in a $201 million auction after receiving wall-to-wall “unacceptable price offers”. South Korea found buyers for only 9% of a tranche worth $520 million and Colombia cut its auction this week by 40% to $77 million.

Russia cancelled a planned sale of $304 million because there are no takers for the yield of 7.7% it is offering.

The yields on South African bonds due in 2026 jumped by 53 basis points to 8.42% after Bernanke spoke.

Société Générale predicted that the yield could rise to 9.4%, making South African borrowings exceedingly expensive.

Bonds from Germany, Britain and Australia all fell.

The two fundamental determinants of South Africa’s export earnings, gold and platinum, both took massive hits this week. The rand took a knock on Thursday and despite a slight recovery on Friday, ended the week trading at 10.20 to the dollar.

Before Bernanke’s speech, gold was trading at roughly $1 380 per ounce. The day afterwards, it fell as low as $1 269 before ending the week at $1 288.

The gold mines listed on the JSE fell in tandem with the gold mining index, losing about 11% in the week, reducing the collective value of AngloGold Ashanti, Gold Fields, Sibanye Gold, Harmony and others to R125 billion – half what they were worth a year ago.

It is getting more and more likely that gold companies will irrefutably be able to plead actual poverty in the looming wage negotiations.

The global readjustment to a world without quantitative easing is set to throw off positive economic figures released by the SA Reserve Bank this week.

On Wednesday, the bank’s June Bulletin said that “South Africa’s current account deficit unexpectedly narrowed to 5.8% of gross domestic product, R191 million, for the first quarter of 2013, from 6.5% in the fourth quarter of last year.

The bank said this week “a pick-up in global economic activity led to an increase in demand for South African exports, particularly from emerging markets, while export revenues were also boosted by a weaker rand”.

Stats SA released an inflation figure for May which was lower than expected, at 5.6%, although that predates the rand’s recent dive.

Last year, in a plea to the fiscal planners in G7 countries in international business daily newspaper the Financial Times, Reserve Bank governor Gill Marcus warned of the effects of excess liquidity that was causing financial flows into emerging markets, saying that smaller economies, particularly those with relatively well-developed and open financial markets, bear a disproportionate share of the burdens of advanced economy spillovers.

She explained the implications of fiscal policy choices on smaller economies and said the fiscal policy choices of advanced countries complicated macroeconomic policies of emerging countries, with dire implications for exchange rates and commodity prices.

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