Archive for April 18, 2017

South Africa’s Debt Downgrade

There seems to be little that can stop the momentum which is propelling South Africa towards the lowest credit rating possible on the international markets.  The latest setback involves S&P (Standard and Poor) reported by the BBC (use a VPN for access) who have downgraded the country’s credit rating to junk status after the finance minister was dismissed suddenly.

The global ratings department of S&P brought South Africa’s sovereign debt rating down because it considered the sacking of the respected finance minister, Pravin Gordhan a risk to the implementation of the country’s fiscal policy.

Needless to say this had a negative effect on the markets as the Rand plummeted by nearly 2% against the dollar while the value of Government bonds dropped sharply too.   The depreciation fall was the worse in nearly two years and came in response to the sacking of the finance minister and also other cabinet members.

The credit rating is important to all countries as it has a serious effect on the interest rates the country pays when borrowing on the international markets.   It has surprised many that the President risked this turmoil when he knew that the agency was going to be announcing an assessment on his country’s prospects.

The country has not reached the ‘junk’ status that most countries fear but currently are only two points above that rating.  However there is a real possibility that the other major agencies will similarly cut their ratings too for the country.  If South Africa does end up with ‘junk’ ratings there will be profound effects for the economy as a whole.  Many pension and investment funds for example will automatically sell their bonds if they reach this status which will cause further pressure on their value.  This will mean that the government’s borrowing costs will rise sharply which as they are running a large deficit will be substantial.

This is not the first of the emerging economies to suffer such a downgrade, Russia and Brazil both were downgraded to junk status in 2015 due to their struggling economies.   It will certainly add to the pressure on President Zuma and you can see on the local TV broadcasts that this is rising substantially.  You may need to use a good vpn service like this to access some of the African only broadcasts on local Television channels.

Germany’s Credit Surplus Rises Again

Donald Trump doesn’t like surpluses, specifically those trade surpluses that many countries run with America.  The US has huge trade deficits with many countries including China, Mexico and Germany – something he seeks to change.

Germany is no stranger to surpluses of many sort, this year they announced another huge current account surplus of 9% of GDP, higher than even the South Koreans of 7%. It is unlikely that this is a problem to the countries themselves but how about the global economy.

Where does all this surplus go?  Well the vast majority of it exists in global financial assets which will be owned by countries like Germany and the others running large credit surpluses.  These are of course simply investments and may rise or fall in value just like anything else.  It is useful for countries to have these assets especially in a time of aging populations and growing demands on care and health costs.

The simple fact with trade surpluses is that by definition they have to be balanced by deficits in other countries.   The huge trade surplus or balance in one country will be matched by similar deficits in other countries, hence President trump’s wrath  – America is funding these surpluses in many places.

Having a huge imbalance is not sustainable in the long run for any country and is basically not good for international or global trade.  These are not just numbers on a balance sheet though, surpluses and deficits represent people’s jobs and livelihoods o(or lack of them).

Unemployment can be the result of running large trade deficits but this is not always the case.  Both the UK and the US run substantial trade deficits alongside relatively low levels of unemployment.   The problem really is where this money ends up, the amounts of money that are taken out of the global economy due to unneeded current account surpluses.

The German’s often have a reputation for being spendthrift or careful savers, however that’s not supported completely by the figures.  In fact if you watch global TV which many Germans do – check out German’s who watch BBC iPlayer through VPNS for instance.   However the question is what happens to that money the German’s simply don’t need, is it all diverted into valuable infrastructure projects around the world?  Some is but more often it gets related into property speculation schemes or high return financial projects which bring little benefit to ordinary economies around the world.. Sometimes this money can be traced to events which cause even more financial chaos such as when American housing bubble which ended up causing the 2008 financial crises.

James Heritage

Author of the Italian – Rai Streaming Estero

International Debt Burden of Africa

The path to prosperity doesn’t lie amidst countries building even bigger international debt states Akinwumi Adesina, the head of the African Development Bank.   He is quite clear when he urges the continent’s governments to try and boost tax revenue not grab yet more international loans.  The statement comes whilst Africa, once again grapples with an economic slump.

money-1604921_640

Mr Adesina is reported with an interview in the Financial Times to be expecting yet another downturn in the economy of Africa largely being triggered by a slump in commodity prices.  This issue greatly affects Africa as well as the slow down in Chinese economic growth.  Yet as always Africa is one of the first to suffer from external economic slowdown, largely because of it’s relative financial weakness, in other words it’s large levels of debt.

The phrase ‘fiscal consolidation’ is often used to describe Africa’s position and potential solution.  The reality is that decades of borrowing have had only limited success in delivering long term growth in the region.  Sure when economic booms are happening in other places, Africa is dragged along through a demand for it’s commodities but the weakness is evident as soon as this demand drops.  Nigeria has plunged into yet another recession simply due to the oil price fall, although to be fair this is the first for nearly twenty years.

The pattern will be repeated across sub-Saharan Africa, with GDP falling from it’s 3.5% level in 2015.  Many nations are suffering from dwindling government revenues, and the wide budget deficits mean that governments have little monetary options available to them.  The temptation of increasing debt is always there but this is precisely the reason why African economies are so vulnerable, billions of dollars of debt taken up in the ‘good years’ reduce the capacity of these governments to respond in a slump.

These debts have to be repaid and the costs of servicing them often rocket in poor economic conditions simply because of the weakness of most African currencies.  The scarcity of foreign currencies also impacts African countries and businesses to invest.

Borrowing overseas with a weak domestic currency is a recipe for disaster,  investment funds should ideally be sourced locally.  For example there are huge African investment and pension funds which ideally could be used to support the African economy.  Too often this money is invested in Western countries and businesses to the detriment of African businesses.  It’s often depressing to sit in the presentations of these Pension and investment funds produced by some anonymous company who conducts most of their business through a residential VPN (see here) to be extolling the virtues of some international company with minimal links to the African continent when local companies are starved of investment and the potential for growth.

Frank Ifield