Inside Insights 22 June 2009

Investment Intelligence|Inside Insights

A weekly, in-depth yet concise report on the most important recent market movements and economic developments.

Added on 22 June 2009 @ 12:00 PM

Rand staying strong

The rand-dollar exchange rate is still hovering at levels slightly above R8/$. Is this because the rand is strong or is the dollar weak? One way to answer the question is to compare the performance of the rand against other currencies. Year-to-date the rand appreciated around 15% against both the dollar and the euro, and 2% against the pound, with most of the strength coming since March. Another way is to compare the euro-dollar exchange rate. Year-to-date it is pretty much flat, but the euro has gained around 10% against the dollar since March. Lastly, we can compare the dollar against currencies from countries similar to SA (resource exporters and emerging markets). For example, against the Australian dollar the greenback has lost roughly 12% and against the Brazilian real 15% year-to-date. Against the Turkish Lira and Indian Rupee the dollar is pretty much where it started the year, but again it has lost ground since March. All this suggests that it is an increase in global risk appetite over the last three months that has seen investors sell dollars (the safe-haven currency) and buy higher-yielding currencies. While risk appetite mostly determines the short-term fortunes of the rand, the large current account deficit will keep the rand vulnerable over the medium-term. And ultimately, any exchange rate is determined by the respective inflation rates of the two countries (according to purchasing power parity (PPP) theory. As we are only too aware, inflation remains uncomfortably high in South Africa, while it is heading towards negative territory in our major trading partners.

First quarter balance of payments data from the Reserve Bank's Quarterly Bulletin shows that the current account deficit widened to 7% of GDP from 5.8% in the last quarter of 2008, worse than the 6% of GDP expected by the market. The main reason is that exports fell faster than imports due to weak global demand conditions, while net income payments, the biggest component of the current account deficit, did not fall as much as expected. Net income payments fell to 2.4% of GDP during the first quarter, down from 2.7% during the previous quarter as local companies cut back dividend payments.

Local consumers still under pressure

With the first wave of April economic data out, we can start to get an idea of what the second quarter's GDP numbers might look like (after that -6.4% first quarter shocker). We touched on dismal mining and manufacturing data last week. Year-on-year real retail sales growth was equally disappointing: -6.7% is the worst number since 2003, accelerating from March's -4.9% High debt burdens continue to be a problem. Data from the Quarterly Bulletin showed that the level of household debt to disposable income remained high at 76.7% during the first quarter, compared to 76.3% during the previous quarter. Put differently, households spent 10.9% of disposable income servicing debt, only slightly down from 11.7% in the previous quarter. Debt, with rising unemployment, offset growth in disposable income from tax cuts, double-digit wage increases and the 450 basis points reduction in interest rates. While the latter typically takes around 12 months to start impacting the real economy, especially with bank lending criteria still strict, a further 50 basis points cut is probably on the cards later this week. This view is supported by the 28% year-on-year decline in the value of building plans passed in April, especially the 56.7% decline in residential building plans passed. As we said last week, April and March year-on-year data should always be treated with care as the Easter long-weekend moves around, which has a significant impact on economic activity. This year also saw an extra public holiday for the elections. This notwithstanding, the data out so far suggests that the second quarter of the year will see negative GDP growth once again, the third quarter in a row.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights