South Africa Analysis

SA is unique in having such a dependence on primary output. Boom and bust happens everywhere but in SA the cycles have bigger amplitudes. The main issue is that SA just cannot seem to attract foreign direct investment (FDI), meaning that it cannot fund a current account deficit without jacking up interest rates to attract hot money. As SA's economy is counter-cyclical, i.e. because its commodity basket is late cycle, SA interest rates tend to high when everyone else's are low, causing wild swings in money flow. The issue here is that everyone, including Mr. Mboweni, knows this and knows what's going to happen in the future. The problem is that the ANC still doesn't like encouraging FDI because to do so would mean it having to abandon much of its social engineering agenda.

The ZAR will tank because its strength carries the seeds of its own destruction. SA is structurally an inefficient economy which cannot produce the goods its economy needs. It remains a primary exporter (much like Australia). When the price of primary commodities rise so do the earnings of the producers, so does the Government's tax take and so does the currency. But the currency overshoots - it always does - and the commodity producers get squeezed. At around this time the good old SA consumer resumes his/her love affair with imports and the trade balance starts to tilt into the red. There is little or no FDI into SA, so hot money has to come in - attracted by interest rates to balance the books. The ZAR continues to rise, primary producers are stuffed. The Government cuts rates to bring down the ZAR but all it does is fuel a massive import boom. The economic wheel revolves, SA's late cycle commodity basket starts to weaken and the ZAR begins to slip. The industry is still so messed up that tax receipts and export earnings have fallen away. The current account balloons and the ZAR begins to tank. The Government "welcomes" the correction, but as the slide becomes a descent into the abyss it responds by jacking up interest rates and the whole SA economy grinds to a halt. It’s all happened before and it’s all going to happen again.

In emerging economies, particularly those with commodities - FDI is almost always essential as the cost of development and the long-term nature of the assets requires a time horizon and scale that proto-industrial economies cannot generate. SA's mining infrastructure was created with British capital. It’s hard to see how new projects will be financed given the Government's decisions to make the economy a target of its social policies. Capital that's trapped in SA will leak out, no new capital will come in - and as the savings potential of SA is not sufficient to fund major investments, the economy will be condemned to sub-par growth. In non-economist language, the future is f*cked.

ps:
Property in "post-liberation" African societies is a tricky question. Check Harare - post independence, white flight and very little building and construction. Property becomes scare but is cheap. Cycle 94-96 turns in Zimbabwe's favour and house prices shoot up in real terms as there is a shortage. But the politicians are cr*p and switch to populism (why is a much longer story) and the economics of the country start to go south. Property in hard currency terms gets cheaper but then inflation really lets rip and there is a rush for hard assets. No building as a shortage of forex to pay for materials and lots of cash means that property - in local terms - goes through the roof. I reckon SA is in the Zimbabwe 1994-1996 spot - I hope it doesn't follow through the Zimbabwe cycle, but I suspect it will. So I reckon property in USD/GBP terms to fall sharply - in SA terms mildly for 3-4 years. Then to shoot up in ZAR terms in a rush for hard assets.