2016-02-03
After being bruised and battered in the closing moments of 2015 and by the opening moves of 2016, psychology appears to be making a modest comeback. But is it durable or of short duration?
This as much by way of global markets being encouraged to come away from their oversold condition by soothing central bank noises as our finance minister Gordhan sounding feisty about restoring confidence in the SA economy and preventing us from being reduced to junk. Will it last?
Globally there appears to have been a generalised overreaction to select poor industry data coming out of China, the resumption of its stock market upheaval as yet more stale investors have been shaken out of the tree, and the uncertainty surrounding the attempted Yuan’s decoupling from the Dollar and what it means.
Anxiety appeared to be deepening during widespread selloffs in recent weeks that Chinese growth would continue to disappoint to the downside, that the US economy was flirting with recession, that falling energy prices were evidence of such growing weakness, and that the equity market selloffs worldwide would in turn further erode global growth potential.
And so apparently in warm embrace in a race for the bottom.
As such thinking, actions and reactions gathered momentum, like a tropical storm over water acquiring yet more energy to wreck its devastation, so these many arguments overcame logic (falling oil and gas prices are good for global household consumption) and kept reinforcing and spilling over.
Until apparently three things happened in recent days.
The global movement ran out of fuel, having overstated its case. Cooler minds kept trotting out numbers suggesting an absence of hard landings in the major regions. And central banks kicked in from the sidelines, woeing the multitude with dovish noises or hard actions.
Panics have a way of subsiding when running out of fuel and firmly countered. This is what seems to be taking place. But is it just a breather before the next instalment of fear strikes, resuming the slide? Or genuinely a bad dream being left behind?
There seems to be no good reason to read dire global growth prospects into the oil industry shakeout, which is much more indicative of supply forces battling it out, admittedly in a weak demand environment, but resulting in growth pluses for global households far exceeding energy industry retrenchment.
The Chinese repositioning is for real, the implications for commodity producers dire and requiring adjustment, the need for Yuan decoupling from the Dollar a sensible thing, as much macro-economically as its liberalising reform is to be welcomed longer term micro-economically.
The cleanup in Chinese equity markets after the overzealous promotion of subprime household investing (China’s equivalent attempt of American subprime housing a decade ago?) is a natural outcome of a failed experiment and not an uncontrolled disaster, even if its unfolding feeds spillover anxieties.
The fear that global growth will suffer yet more from all these angles is probably overstated. This of itself offers a check on selling pressure. But ECB President Draghi spelling out the intention to offer more policy stimulus soon if inflation data keeps disappointing, the surprise pre-emptive move by BoJ last week to go to negative interest rates (both actions intended, like the Chinese one, to diverge more firmly from a rising Dollar), thus reinforcing earlier BOE comments about a delayed tightening regime, were powerful counters to the panicking global tide.
This was further reinforced by Fed statements read as dovish, with markets now prepared to discount less than one policy tightening this year (basically implying no change), something not denied by Fed body language (as always future data dependent when this uncertain).
And so the global mood took a breather, spirits lifting, oversold conditions easing and risk looking better than what it has done in ages (weeks….).
Will it hold? Volatility will be high, with uncertainty about Chinese and American playouts particularly sensitive. But the central bank safety net is a huge one, even if allegedly no longer as effective, the energy story is a supportive one, and global growth will probably inch along rather than slide.
Not the basis for strong market recoveries, but possibly good enough to undo some of the spillovers and oversold conditions.
At home, the ANC government has apparently awoken to the dire implications of relegation to junk status, and the growing possibility of having to turn to western institutions for support, if Brics brethren were to be less forthcoming, markets keep selling off, and our national slide were to continue, potentially jeopardizing control over the SA transformation agenda. Witness Nigeria turning to the world bank (in lieu of the IMF) for assistance (with apron strings?).
Thus the undoing of the Nene firing in December and Van Rooyen replacement through the Gordhan recall. Finance minister Gordhan has not let grass grow under his feet, making feisty comments about going to do everything in his power to avert junk, last weekend convening a meeting with private CEOs to pitch his appeal for support.
This has certainly provided some tonic to a morose, worsening local condition. But will it be enough to turn the tide?
It would be surprising indeed if the budget three weeks hence were to deeply disappoint. Don't led a crisis go to waste, with Gordhan apparently offered a historic window to make a difference if he can bridge the confidence chasm. Thus as with the SARB stern discipline of last week upping interest rates by another 0.5%, do expect to hear about spending ceiling, budget deficit reduction and debt spiral arrest?
As with the SARB action, this will likely bolster credibility with global markets. But it won’t be growth friendly if too austere. Perhaps even more crucial, will it be standalone, a one-man crusade, as the greater government casually continues in its chosen way of doing things, undermining institutional vitality, failing to secure business buy-in where it matters (balance sheet commitment)?
Though some of the rating agencies may continue to apply benefit-of-the-doubt, this is wearing thin in a longer term retreat that may not be at an end as our weakening growth and the complicated issues driving it simply aren't addressed. So junk remains on the table in the absence of a more thorough policy rethink, recast and relaunch, something that “perhaps†a next political leadership may attempt, if pressed enough by failing performance and resulting penalties.
Unless, that is, Gordhan were to succeed shortly in securing a business buy-in, thereby possibly raising cash through for instance public asset lease-backs or other forms of infrastructure financing, freeing up budget resources to be used in budget deficit reduction and possibly not as yet needing to resort to major growth-sapping, confidence-destroying tax hikes.
Perhaps government and business can meet each other half way, in financing the coming budget deficit reduction soundly without sinking growth, and retaining the investment grading for the time being, delaying junk, at least buying time.
This remains for now a work in progress.
Cees Bruggemans
Bruggemans & Associates, Consulting Economists
Website www.bruggemans.co.za
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