The speed at which global market sentiment plummeted over a few weeks in September and October took everyone by surprise, not least the IMF. For years it was an article of faith not just at the IMF and World Bank but in most Western and Emerging Market capitals that the global economic boom was self-sustaining and that when the slowdown came, there would be a “soft landing”.
We now know better. In a little-noticed article in the London Financial Times in early 2007, a senior Bank of England official warned that markets were under pricing risk. Markets had overshot, he wrote, as a result of which there was likely to be a sharp adjustment. He was prophetic, albeit insufficiently so to the extent that the “adjustment,” when it came, in the six weeks of September and October 2008 was extreme. So much so that some economists are now saying that the global economy faces its most severe test in more than a century.
In mid-year as energy, food and other commodity prices continued their surge to record highs in a few cases; global economic policymakers were preoccupied with ensuring that there would be no resurgence of inflation. A few months later, inflation has disappeared from the policymakers’ radar screens; oil prices have more than halved, while all commodity prices, especially metals and to a lesser extent, food have retreated substantially.
The conventional wisdom has also changed. Although the bust of 2008 was caused by excessively lax fiscal and monetary policies, the remedy, it seems, is lower interest rates, rapid credit creation and tax cuts. No-one is looking beyond the current crisis to forecast what these will mean for economic performance after 2010, but it is a safe bet that cushioning the 2008/9 recession will rekindle the excesses of 2004-2008 and the cycle will repeat itself, only more so.
None of this is positive for African stock markets. Optimists cling to the “delinking” or “decoupling” thesis that strong emerging market growth, mostly from Asia, will continue to drive the global economy ahead, despite the downturn in industrial economies. Just how misplaced this belief is, was highlighted in early November when China unveiled a US$ 586 billion reflationary package designed to counter its slowdown, thereby confirming that the slowdown is genuinely global and not confined to the industrialized countries alone.
For African economies global recession poses six main threats:
1) Sharply lower commodity prices that will translate into reduced export growth, or in some cases, especially oil exporters, a major reduction in export revenues.
2) Lower commodity prices and exports will put pressure on African currencies, many of which have been overvalued by the commodities boom
3) Weaker currencies will feed into higher inflation, partially offset by lower energy and food prices in most `African countries.
4) Economic growth will slow in line with lower export and government revenues, resulting in increased official borrowing, and faster credit creation, that will feed through into higher inflation in 2010 and 2011.
5) Countries heavily reliant on inflows of foreign capital – especially short-term “hot money” will feel the pinch.
6) Deleverage by hedge funds, no longer the flavour of the year, will curb capital inflows as also will the global swing towards risk aversion that in turns means a repricing of emerging market stocks.
Overall the outlook is for slower output and export growth, weaker currencies, reduced investment, increased government borrowing and spending and higher inflation. None of this is good for African stock markets which because of their “frontier” character are more susceptible to increased risk aversion by global exporters than emerging markets as a whole.
Because the global and regional outlooks are so murky while investors are nervous and jumpy, it is only realistic to anticipate volatile and unpredictable markets over the next few months. Sudden and substantial market swings in the region’s most sophisticated market, Johannesburg, is reporting movements of 2 per cent to 5 per cent daily . This illustrate just how uncertain and indecisive the investor community has become. The signs are that this will continue with markets fluctuating wildly n the back of perceived good or bad news. With governments all over the world having to borrow more, the likelihood is that investor focus will switch from equities – especially emerging and frontier market shares – to government bonds, while they wait for the recessionary dust to settle.
Because the South African market is the most globally-integrated of African stock markets, it is no surprise that the Johannesburg Securities Exchange (JSE) has taken the biggest hit. In local currency terms, shares were down some 30 per cent in the first 10 months of 2008, but in US dollars they have almost halved, reflecting the weakness of the Rand. The JSE all share index peaked at 28,960 in late May, falling toward 18,000 in October before recovering somewhat to 21,000 in early November, some 28 per cent below its best. Resource stocks, especially base metals and platinum, have fallen steeply, while retailers and other domestic-economy businesses have been hit by the projected slowdown in GDP growth in 2009/10 and the weaker rand.
Market sentiment was depressed in early November when rating agency Fitch downgraded South Africa from “stable to “negative,” warning that the risk of a “hard landing or even recession” had increased, largely because of the country’s reliance on inflows of portfolio capital to finance its balance-of-payments deficit, estimated this year at 8 per cent of GDP. Similar concerns were expressed by the IMF in its 2008 report on South Africa, calling for a tighter fiscal policy and even higher interest rates. But even before this report was published Finance Minister Trevor Manual had loosened his fiscal stance in the October mid-term budget, forecasting a swing from budget surplus to deficit next year and in 2010, while signs that inflation has now peaked at 13.6 per cent in August, slowing to 13.6 per cent in September, suggest that the next move in interest rates will be down rather than up. With industrial production, employment, retail and vehicle sales and housing prices all in retreat, the economy is already slowing with latest forecasts suggesting GDP averaging 3 per cent a year in 2008/9. Particularly ominous was the 0.5 per cent fall in employment in the second quarter, which pushed the unemployment rate even higher at 23.2 per cent adding to calls from political and economic radicals for a more expansionist economic policy.
So it was no surprise when at their special economic summit in October, the three groups comprising the country’s Tripartite Alliance – the ruling African National Congress, the South African Communist Party and the South African Congress of Trade Unions – announced plans to shift economic policy to the left over the next few years. Two events, the global recession and the domestic split in the governing ANC, suggest that the policy shift will be more radical than seemed likely a few months ago. With prominent ANC moderates having jumped ship to launch their own party that will contest next year’s parliamentary and presidential elections, the ANC’s centre of gravity has already shifted Left, a move unlikely to be welcomed in the stock market.
The key is the balance-of-payments. In the first 10 months of the year, foreigners sold some R27 billion (US$ 3 billion) worth of South African shares and bonds. Were this to continue, it would be impossible to finance the country’s huge foreign payments deficit; the rand would plunge, inflation revive and growth slow. The markets are saying that South Africa cannot afford the radicalism to which the next likely president, Mr Jacob Zuma, and, especially, his leftwing followers are so strongly committed.
Nigeria’s stock market has taken a similar-sized hit with the domestic share index down 48 per cent since peaking at 66,370 in early March and off by 40 per cent since the start of 2008. It could have been far worse but for official intervention by the Nigerian Stock Exchange to limit share price movements to just 1 per cent a day on the downside and 5 per cent daily on the upside. Early in November this was changed to 5 per cent a day in either direction, which is likely to make the market even more volatile. With some 50 shares of 219 listings, touching 2008 lows in the first week of November there was no shortage of Nigerian analysts claiming that the market is ripe for recovery. With the price-earning ratio down to single digit levels from the dizzy heights reached late last year and in the first quarter of 2008 and the Central Bank of Nigeria likely to ease credit and lower interest rates as the oil boom runs out of steam, they could be right.
Given the strength of nationalist sentiment in the country it was no surprise to see a top NSE official. Mr Musa Elkama urging Nigerian investors to buy shares and listed companies to buy back shares in an attempt to head off “hostile foreign takeovers”. The government-appointed Securities and Exchange Commission has amended the rules for companies to buy back their shares, by allowing them to re-purchase up to 15 per cent of their issued share capital in the hope that this would stabilise prices on the NSE.
Although stock market analysts insist that fundamentals are sound, this is not the case when economic, as distinct from market, fundamentals are taken into account. Inflation remains uncomfortably high at 13 per cent, the Naira looks increasingly overvalued against a background of substantially weaker oil prices, while oil production continues to be undermined by civil unrest in the Niger Delta.
Current macroeconomic trends point to a marked slowdown in investment and growth over the next 2 years, a weaker Naira and higher inflation. With money supply growing 70 per cent in the last year, there are mounting pressures on the central bank to raise interest rates which would boost money market investment at the expense of equities. While local investors may well see the NSE as a hedge against inflation, risk averse foreign investors will take a very different view, suggesting that, at best, the market will consolidate at the 30, 000 to 40, 000 level, staying well below is peaks for the next 18 months.
After surging 161 per cent between December 2005 and February 2008, the Mauritian Stock Exchange has come back to earth with a bump; the market index (Semdex) falling by a more than a third from its February record high of 2,101 points to 1334 points in November. Two explanations stand out: the steep decline in two key tourist sector companies, Sun Resorts and New Mauritius Hotels, on expectations that the island’s crucial tourism money-spinner will be a major casualty of the global economic downturn.
More importantly, perhaps, foreign investors have taken fright, partly because the Mauritian Rupee has weakened in line with emerging market currencies but also because the island’s economy is now seriously exposed. In the last few years it has relied on substantial net capital inflows to finance is worsening balance-of-payments deficit. With these inflows now in retreat at precisely the same time that export growth is slowing, reflecting weaker demand for textiles and clothing and lower sugar prices, the Mauritian economy is looking exposed. If the global recession is as severe and protracted as many now fear, the Mauritian Bourse seems likely to retreat further before recovering in the latter part of 2009 at best.
After a strong first half, the Nairobi Stock Exchange plummeted in the third quarter with the index collapsing from a peak of 5,152 at the end of June to 3,612 in November, a decline of 30 per cent. Some Kenyan analysts such as Mr Job Kihumba, Executive Director of Standard Investment Bank blame negative sentiment, arguing that the fundamentals remain sound. Others like Mr Chris Mwebesa, Chief Executive of the Nariobi Exchange see it differently attributing the slide to technical factors such as the exodus of foreign investors from the market, the switch by Kenyans from equities to fixed interest investments denominated in US dollars and selling by investors to meet margin calls on their borrowings. Typically, foreign investors account for about a fifth of NSE turnover, but since July this has almost trebled to 55 per cent, with the bulk of it being sold as foreigners switched from net buyers to net sellers. Despite this, Mwebesa is upbeat, warning investors that it is not smart to sell shares just at the times when – he believes – the market is bottoming out. Volumes are very low, he says, meaning that investors, seemingly confident that the worst is over, are staying put rather than selling.
Two African Stock markets have bucked this downtrend; the Ghana and Zimbabwe Stock Exchanges, though the latter’s ongoing nominal rally, itself no more than a statistical artefact, merely disguises collapsing corporate earnings and an increasingly desperate economic crisis. In stark contract the performance of the Ghana Stock Exchange has been stellar, up over 60 per cent during 2008. There are two main explanations for this. The major one is the market’s illiquidity. Shares are very tightly held and turnover is tiny. Accordingly, any buying support quickly translates into booming stock prices. The nearby Nigerian Stock Exchange has 219 listed companies and a market valuation of some US$ 80 billion while just 34 companies are listed on the Accra exchange in Ghana with a market capitalization of US$15 billion.
The market is dominated by a handful of commodity stocks and foreign-owned companies - led by AngloGold Ashanti, Golden Star Resources and Ecobank Transnational, which between them account for some 60 per cent of trading volumes. Market liquidity is set to increase next year when at least four new listings are promised. Not before time, because on some days no shares are traded. The second explanation for Accra’s boom is the fact that it was largely neglected when other African frontier markets took off in 2006/7. During 2008 buyers have been playing catch-up but with the growth of risk aversion towards frontier markets, it seems that the boom is over – at least for the next six months to a year.
In just one trading session on November 10, industrial share prices on the Zimbabwe Stock Exchange rose 1833 per cent while the narrower, and less representative, mining share index went up 1350 per cent. In other words, the ZSE has lost all touch with reality. Inflation, when last officially recorded last July, was a staggering 231 million per cent, though some current estimates now put it at hundreds of billion per cent. The Zimbabwe dollar, in which share prices are calculated, has virtually disappeared from circulation. Dollarization is widespread with retailers now officially allowed to set prices and trade in foreign exchange, mostly US dollars or South African Rand.
The real economy is in free fall. Even the most conservative estimates put the 2008 decline in GDP at a minimum of 10 per cent. By the end of 2008, real GDP will have fallen some 40 per cent to 50 per cent from its peak in 1998. Corporate results tell the true story. Company after company have reported plunging profits, with Star Africa, a retailing and wholesaling business and sugar refiner, reporting an 88 per cent earnings slump (in US dollars). Radar, which owns Border Timbers, a major exporter, says that it was unable to operate for four months of the year due to power outages, while it has lost over 6,500 hectares of forest to forest fires started by arsonists and illegal land occupiers. Falcon Gold says output was down 71 per cent and it ran a loss in the first 9 months of 2008 while at Lafarge Cement export volumes were down 56 per cent and domestic sales, 26 per cent. Cairns Holdings (food and wine manufacturer) says volumes were halved while turnover fell by three-quarters and operating earnings plunged 83 per cent to just over US$ 1 million. In this situation stock market statistics are meaningless, reflecting the fact that savers have virtually no alternative to investing in equities which at least make a show of keeping up with inflation – now so high as to be incalculable, and the collapsing currency.
Going forward, most African equity markets can expect more of the same with markets volatile but probably trending downwards. The signs are that the commodity price boom (2003-2008) is over and even the super-optimistic IMF has started cutting its forecasts for African economic growth in 2009/10, from nearly 7 per cent in 2006 and 5.5 per cent this year to 5 per cent in 2008. Because Africa lags the global economic cycle, equity markets are likely to remain in consolidation or recovery territory for the next year or so.
PULL OUTS
Although the bust of 2008 was caused by excessively lax fiscal and monetary policies, the remedy, it seems, is lower interest rates, rapid credit creation and tax cuts.
The markets are saying that South Africa cannot afford the radicalism to which the next likely president, Mr Jacob Zuma, and, especially, his leftwing followers are so strongly committed.
After surging 161 per cent between December 2005 and February 2008, the Mauritian Stock Exchange has come back to earth with a bump.
The signs are that the commodity price boom (2003-2008) is over and even the super-optimistic IMF has started cutting its forecasts for African economic growth in 2009/10.
We now know better. In a little-noticed article in the London Financial Times in early 2007, a senior Bank of England official warned that markets were under pricing risk. Markets had overshot, he wrote, as a result of which there was likely to be a sharp adjustment. He was prophetic, albeit insufficiently so to the extent that the “adjustment,” when it came, in the six weeks of September and October 2008 was extreme. So much so that some economists are now saying that the global economy faces its most severe test in more than a century.
In mid-year as energy, food and other commodity prices continued their surge to record highs in a few cases; global economic policymakers were preoccupied with ensuring that there would be no resurgence of inflation. A few months later, inflation has disappeared from the policymakers’ radar screens; oil prices have more than halved, while all commodity prices, especially metals and to a lesser extent, food have retreated substantially.
The conventional wisdom has also changed. Although the bust of 2008 was caused by excessively lax fiscal and monetary policies, the remedy, it seems, is lower interest rates, rapid credit creation and tax cuts. No-one is looking beyond the current crisis to forecast what these will mean for economic performance after 2010, but it is a safe bet that cushioning the 2008/9 recession will rekindle the excesses of 2004-2008 and the cycle will repeat itself, only more so.
None of this is positive for African stock markets. Optimists cling to the “delinking” or “decoupling” thesis that strong emerging market growth, mostly from Asia, will continue to drive the global economy ahead, despite the downturn in industrial economies. Just how misplaced this belief is, was highlighted in early November when China unveiled a US$ 586 billion reflationary package designed to counter its slowdown, thereby confirming that the slowdown is genuinely global and not confined to the industrialized countries alone.
For African economies global recession poses six main threats:
1) Sharply lower commodity prices that will translate into reduced export growth, or in some cases, especially oil exporters, a major reduction in export revenues.
2) Lower commodity prices and exports will put pressure on African currencies, many of which have been overvalued by the commodities boom
3) Weaker currencies will feed into higher inflation, partially offset by lower energy and food prices in most `African countries.
4) Economic growth will slow in line with lower export and government revenues, resulting in increased official borrowing, and faster credit creation, that will feed through into higher inflation in 2010 and 2011.
5) Countries heavily reliant on inflows of foreign capital – especially short-term “hot money” will feel the pinch.
6) Deleverage by hedge funds, no longer the flavour of the year, will curb capital inflows as also will the global swing towards risk aversion that in turns means a repricing of emerging market stocks.
Overall the outlook is for slower output and export growth, weaker currencies, reduced investment, increased government borrowing and spending and higher inflation. None of this is good for African stock markets which because of their “frontier” character are more susceptible to increased risk aversion by global exporters than emerging markets as a whole.
Because the global and regional outlooks are so murky while investors are nervous and jumpy, it is only realistic to anticipate volatile and unpredictable markets over the next few months. Sudden and substantial market swings in the region’s most sophisticated market, Johannesburg, is reporting movements of 2 per cent to 5 per cent daily . This illustrate just how uncertain and indecisive the investor community has become. The signs are that this will continue with markets fluctuating wildly n the back of perceived good or bad news. With governments all over the world having to borrow more, the likelihood is that investor focus will switch from equities – especially emerging and frontier market shares – to government bonds, while they wait for the recessionary dust to settle.
Because the South African market is the most globally-integrated of African stock markets, it is no surprise that the Johannesburg Securities Exchange (JSE) has taken the biggest hit. In local currency terms, shares were down some 30 per cent in the first 10 months of 2008, but in US dollars they have almost halved, reflecting the weakness of the Rand. The JSE all share index peaked at 28,960 in late May, falling toward 18,000 in October before recovering somewhat to 21,000 in early November, some 28 per cent below its best. Resource stocks, especially base metals and platinum, have fallen steeply, while retailers and other domestic-economy businesses have been hit by the projected slowdown in GDP growth in 2009/10 and the weaker rand.
Market sentiment was depressed in early November when rating agency Fitch downgraded South Africa from “stable to “negative,” warning that the risk of a “hard landing or even recession” had increased, largely because of the country’s reliance on inflows of portfolio capital to finance its balance-of-payments deficit, estimated this year at 8 per cent of GDP. Similar concerns were expressed by the IMF in its 2008 report on South Africa, calling for a tighter fiscal policy and even higher interest rates. But even before this report was published Finance Minister Trevor Manual had loosened his fiscal stance in the October mid-term budget, forecasting a swing from budget surplus to deficit next year and in 2010, while signs that inflation has now peaked at 13.6 per cent in August, slowing to 13.6 per cent in September, suggest that the next move in interest rates will be down rather than up. With industrial production, employment, retail and vehicle sales and housing prices all in retreat, the economy is already slowing with latest forecasts suggesting GDP averaging 3 per cent a year in 2008/9. Particularly ominous was the 0.5 per cent fall in employment in the second quarter, which pushed the unemployment rate even higher at 23.2 per cent adding to calls from political and economic radicals for a more expansionist economic policy.
So it was no surprise when at their special economic summit in October, the three groups comprising the country’s Tripartite Alliance – the ruling African National Congress, the South African Communist Party and the South African Congress of Trade Unions – announced plans to shift economic policy to the left over the next few years. Two events, the global recession and the domestic split in the governing ANC, suggest that the policy shift will be more radical than seemed likely a few months ago. With prominent ANC moderates having jumped ship to launch their own party that will contest next year’s parliamentary and presidential elections, the ANC’s centre of gravity has already shifted Left, a move unlikely to be welcomed in the stock market.
The key is the balance-of-payments. In the first 10 months of the year, foreigners sold some R27 billion (US$ 3 billion) worth of South African shares and bonds. Were this to continue, it would be impossible to finance the country’s huge foreign payments deficit; the rand would plunge, inflation revive and growth slow. The markets are saying that South Africa cannot afford the radicalism to which the next likely president, Mr Jacob Zuma, and, especially, his leftwing followers are so strongly committed.
Nigeria’s stock market has taken a similar-sized hit with the domestic share index down 48 per cent since peaking at 66,370 in early March and off by 40 per cent since the start of 2008. It could have been far worse but for official intervention by the Nigerian Stock Exchange to limit share price movements to just 1 per cent a day on the downside and 5 per cent daily on the upside. Early in November this was changed to 5 per cent a day in either direction, which is likely to make the market even more volatile. With some 50 shares of 219 listings, touching 2008 lows in the first week of November there was no shortage of Nigerian analysts claiming that the market is ripe for recovery. With the price-earning ratio down to single digit levels from the dizzy heights reached late last year and in the first quarter of 2008 and the Central Bank of Nigeria likely to ease credit and lower interest rates as the oil boom runs out of steam, they could be right.
Given the strength of nationalist sentiment in the country it was no surprise to see a top NSE official. Mr Musa Elkama urging Nigerian investors to buy shares and listed companies to buy back shares in an attempt to head off “hostile foreign takeovers”. The government-appointed Securities and Exchange Commission has amended the rules for companies to buy back their shares, by allowing them to re-purchase up to 15 per cent of their issued share capital in the hope that this would stabilise prices on the NSE.
Although stock market analysts insist that fundamentals are sound, this is not the case when economic, as distinct from market, fundamentals are taken into account. Inflation remains uncomfortably high at 13 per cent, the Naira looks increasingly overvalued against a background of substantially weaker oil prices, while oil production continues to be undermined by civil unrest in the Niger Delta.
Current macroeconomic trends point to a marked slowdown in investment and growth over the next 2 years, a weaker Naira and higher inflation. With money supply growing 70 per cent in the last year, there are mounting pressures on the central bank to raise interest rates which would boost money market investment at the expense of equities. While local investors may well see the NSE as a hedge against inflation, risk averse foreign investors will take a very different view, suggesting that, at best, the market will consolidate at the 30, 000 to 40, 000 level, staying well below is peaks for the next 18 months.
After surging 161 per cent between December 2005 and February 2008, the Mauritian Stock Exchange has come back to earth with a bump; the market index (Semdex) falling by a more than a third from its February record high of 2,101 points to 1334 points in November. Two explanations stand out: the steep decline in two key tourist sector companies, Sun Resorts and New Mauritius Hotels, on expectations that the island’s crucial tourism money-spinner will be a major casualty of the global economic downturn.
More importantly, perhaps, foreign investors have taken fright, partly because the Mauritian Rupee has weakened in line with emerging market currencies but also because the island’s economy is now seriously exposed. In the last few years it has relied on substantial net capital inflows to finance is worsening balance-of-payments deficit. With these inflows now in retreat at precisely the same time that export growth is slowing, reflecting weaker demand for textiles and clothing and lower sugar prices, the Mauritian economy is looking exposed. If the global recession is as severe and protracted as many now fear, the Mauritian Bourse seems likely to retreat further before recovering in the latter part of 2009 at best.
After a strong first half, the Nairobi Stock Exchange plummeted in the third quarter with the index collapsing from a peak of 5,152 at the end of June to 3,612 in November, a decline of 30 per cent. Some Kenyan analysts such as Mr Job Kihumba, Executive Director of Standard Investment Bank blame negative sentiment, arguing that the fundamentals remain sound. Others like Mr Chris Mwebesa, Chief Executive of the Nariobi Exchange see it differently attributing the slide to technical factors such as the exodus of foreign investors from the market, the switch by Kenyans from equities to fixed interest investments denominated in US dollars and selling by investors to meet margin calls on their borrowings. Typically, foreign investors account for about a fifth of NSE turnover, but since July this has almost trebled to 55 per cent, with the bulk of it being sold as foreigners switched from net buyers to net sellers. Despite this, Mwebesa is upbeat, warning investors that it is not smart to sell shares just at the times when – he believes – the market is bottoming out. Volumes are very low, he says, meaning that investors, seemingly confident that the worst is over, are staying put rather than selling.
Two African Stock markets have bucked this downtrend; the Ghana and Zimbabwe Stock Exchanges, though the latter’s ongoing nominal rally, itself no more than a statistical artefact, merely disguises collapsing corporate earnings and an increasingly desperate economic crisis. In stark contract the performance of the Ghana Stock Exchange has been stellar, up over 60 per cent during 2008. There are two main explanations for this. The major one is the market’s illiquidity. Shares are very tightly held and turnover is tiny. Accordingly, any buying support quickly translates into booming stock prices. The nearby Nigerian Stock Exchange has 219 listed companies and a market valuation of some US$ 80 billion while just 34 companies are listed on the Accra exchange in Ghana with a market capitalization of US$15 billion.
The market is dominated by a handful of commodity stocks and foreign-owned companies - led by AngloGold Ashanti, Golden Star Resources and Ecobank Transnational, which between them account for some 60 per cent of trading volumes. Market liquidity is set to increase next year when at least four new listings are promised. Not before time, because on some days no shares are traded. The second explanation for Accra’s boom is the fact that it was largely neglected when other African frontier markets took off in 2006/7. During 2008 buyers have been playing catch-up but with the growth of risk aversion towards frontier markets, it seems that the boom is over – at least for the next six months to a year.
In just one trading session on November 10, industrial share prices on the Zimbabwe Stock Exchange rose 1833 per cent while the narrower, and less representative, mining share index went up 1350 per cent. In other words, the ZSE has lost all touch with reality. Inflation, when last officially recorded last July, was a staggering 231 million per cent, though some current estimates now put it at hundreds of billion per cent. The Zimbabwe dollar, in which share prices are calculated, has virtually disappeared from circulation. Dollarization is widespread with retailers now officially allowed to set prices and trade in foreign exchange, mostly US dollars or South African Rand.
The real economy is in free fall. Even the most conservative estimates put the 2008 decline in GDP at a minimum of 10 per cent. By the end of 2008, real GDP will have fallen some 40 per cent to 50 per cent from its peak in 1998. Corporate results tell the true story. Company after company have reported plunging profits, with Star Africa, a retailing and wholesaling business and sugar refiner, reporting an 88 per cent earnings slump (in US dollars). Radar, which owns Border Timbers, a major exporter, says that it was unable to operate for four months of the year due to power outages, while it has lost over 6,500 hectares of forest to forest fires started by arsonists and illegal land occupiers. Falcon Gold says output was down 71 per cent and it ran a loss in the first 9 months of 2008 while at Lafarge Cement export volumes were down 56 per cent and domestic sales, 26 per cent. Cairns Holdings (food and wine manufacturer) says volumes were halved while turnover fell by three-quarters and operating earnings plunged 83 per cent to just over US$ 1 million. In this situation stock market statistics are meaningless, reflecting the fact that savers have virtually no alternative to investing in equities which at least make a show of keeping up with inflation – now so high as to be incalculable, and the collapsing currency.
Going forward, most African equity markets can expect more of the same with markets volatile but probably trending downwards. The signs are that the commodity price boom (2003-2008) is over and even the super-optimistic IMF has started cutting its forecasts for African economic growth in 2009/10, from nearly 7 per cent in 2006 and 5.5 per cent this year to 5 per cent in 2008. Because Africa lags the global economic cycle, equity markets are likely to remain in consolidation or recovery territory for the next year or so.
PULL OUTS
Although the bust of 2008 was caused by excessively lax fiscal and monetary policies, the remedy, it seems, is lower interest rates, rapid credit creation and tax cuts.
The markets are saying that South Africa cannot afford the radicalism to which the next likely president, Mr Jacob Zuma, and, especially, his leftwing followers are so strongly committed.
After surging 161 per cent between December 2005 and February 2008, the Mauritian Stock Exchange has come back to earth with a bump.
The signs are that the commodity price boom (2003-2008) is over and even the super-optimistic IMF has started cutting its forecasts for African economic growth in 2009/10.
