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Blog Post

Is the Fragile Five Label Fitting?

31 March 20142Comments

31 March 2014

Last year Morgan Stanley coined the phrase the “Fragile Five,” lumping South Africa together with India, Brazil, Indonesia and Turkey as being the countries that were most at risk when the Federal Reserve started tapering off its Quantitative Easing program.

(Which in the Central Banking for Dummies Handbook means ‘buy more debt to solve an already insurmountable debt problem’).

But is it fair for South Africa to be lumped together with these other economies, as being susceptible to a flight of foreign capital when the injection of cheap money inevitably comes to an end?

Finance Minister Gordhan did not seem to think so, saying it was “regrettable and short-sighted.”

But the danger flag was (and is) undeniable – a Twin Deficit that has mushroomed alarmingly since the turn of the century.


Fragile Five - SA Twin Deficits Spells Danger
Click to see full size...


The chart shows a history of the Current Account (what the country receives from trade of goods, services and investments offshore, less what it spends) as well as the Fiscal (Budget) Account (what the government earns in taxes, less what it spends), both reflected as a percentage of GDP.

As you can clearly see, in 2000 there was a zero Combined deficit, but since then the situation has steadily deteriorated to the point where 2013 recorded a Combined deficit of 11% of GDP!

And the problem with that?

Well, if you spend 11% more than you earn, you need to borrow to make up the shortfall. Fortunately, because of low interest rates overseas, foreigners have been happy to bring their money into our markets (to earn a premium return).

The problem is – just as quickly and easily as this money has come in, it can and will go out – at the first sign of a potential loss of capital.

And unfortunately, that is exactly what has happened, with foreigners being net sellers in both the bond and stock markets for 2013.

And the net result – a Rand depreciation of 24% for the year!


Having twin deficits is serious enough, but reliance on (and encouragement of) short-term capital flows to shore up these long term shortfalls is probably as close to ‘regrettable and short-sighted’ as you will get!

As always, would appreciate your feedback and comments.

To your success~

James Paynter

P.S. And if you are exposed to Rand currency fluctuations, and are feeling frustrated by the Rand's wild movements, let us assist you by giving you up-to-date forecasts so that you can better time your transactions, and save you time, money, stress and effort. Go here for details.

And remember we offer a full 60 days risk-free money-back guarantee, so you have a full 2 months to try it out.

budget deficit current account deficit Fed tapering fragile five Quantitative Easing Rand analysis Rand exchange rate Rand forecast SA economy twin deficits

James Paynter
James Paynter

« Previous Post Does News Determine Market Direction? Next Post » When Will SA’s External Debt Bubble Burst?

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    2 replies to "Is the Fragile Five Label Fitting?"

    • Peter Penhall
      31 March 2014

      Hi James,

      That GRAVY TRAIN sure is going downhill fast!! Will probably be extremely difficult to turn this around in the short term without severely effecting the economy, which in itself is in a very fragile state right now.

      What effects do you see this having on the Rand say within the balance of this year, and separately during 2015?

      Reply
      • FXadmin
        3 April 2014

        Hi Peter, afraid so yes - we could see some further consolidation this year, but overall the Rand is expected to weaken per our forecasts.

        Reply

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