Archive for July, 2009

South Africa: Managing the economic crisis

July 30, 2009

South Africa: Africa's Largest Economy  Source: www.thecommonwealth.org

Africa’s largest economy, with US$276 billion in GDP, is the continent’s rising power.  With 48 million people, it is not the continent’s most populous, with a lower population than oil-rich Nigeria (155 million) and Egypt (80 million), the world’s most populous Arab nation.  But South Africa is richer than these countries, in spite of its more skewed income distribution — South Africa has a Gini index of income inequality of 57.8, similar to Brazil’s, and worse than Egypt’s 34 and Nigeria’s 43.7.   And, with unemployment of 23%, this regional power has substantial structural challenges.

A national election in April-May 2009 occurred smoothly, after an intra-ANC power struggle resulted in the resignation of President Mbeki, post-Apartheid South Africa’s second president, following Nelson Mandela, the country’s George Washington and a major moral force in the world.  The ANC holds nearly two-thirds of the seats in the National Assembly, lording over a few much smaller opposition parties.  The ANC, which has held power for fifteen years, has much more to do to overcome the country’s nagging social problems and unleash its growth potential.

Fitch Ratings affirmed South Africa’s sovereign ratings this week, with the foreign currency rating of BBB+, the same as Libya’s ratings, but higher than all the other sixteen African nations Fitch rates.  South Africa is rated the same as Mexico, a notch higher than Russia, and two notches higher than Brazil and India.  Its credit strengths include low, though rising, public debt and good, though not stellar macroeconomic performance.  The economy grows less rapidly than other BBB sovereigns, expanding an average of 4.7% per year in the five years through 2007.  Its public debt is on the rise, given much needed infrastructure spending and a severe skills shortage.  Its banking system is strong relative to other emerging market economies (EMEs).  The economy has experienced only a modest slowdown as a result of the global economic crisis.  South Africa’s ratings were given a Negative Outlook in November 2008, along with many other EMEs, as Fitch concluded that the so-called “decoupling” of these economies from what was going on in the developed world was not a reality.  Since then, South Africa seems to have weathered the storm fairly well, with capital inflows resuming, though Fitch is taking a wait-and-see attitude.   South Africa’s wide current account deficit, at over 7% in recent years, financed in part by volatile portfolio capital, leaves the country vulnerable to external shocks.

Fitch published a report on South Africa this week, and its accompanying press release can be found below. 

“Fitch Affirms South Africa at ‘BBB+’; Outlook Remains Negative   

27 Jul 2009 6:23 AM (EDT)


Fitch Ratings-London-27 July 2009: Fitch Ratings has today affirmed all of South Africa’s sovereign ratings. The country’s Long-term foreign currency Issuer Default Rating (IDR) is ‘BBB+’ and the Long-term local currency IDR is ‘A’, while the Short-term foreign currency IDR is ‘F2’. The Outlooks on the Long-term foreign and local currency IDRs remain Negative. Fitch has affirmed the Country Ceiling at ‘A’.

“South Africa is weathering the global recession and credit crunch quite well compared to its rating peers,” says Veronica Kalema, Director, Fitch’s Sovereign group. “Although GDP will fall by 1%-2% this year, this will be far less than most ‘BBB’ category sovereigns. Political risk has also eased since April’s smooth transfer of power to President Zuma. However, the post-election political landscape and its implications for policy is still unfolding, at a time when the budget deficit is rising sharply and the current account deficit, while diminished, remains large and presents continuing financing challenges.”

South Africa’s ratings have been on Negative Outlook since November 2008 when Fitch took negative rating action on a number of major emerging markets in the face of the sudden and fast deterioration of the global economic environment in the second half of last year. South Africa has been affected mainly through trade and capital flows channels; there were large portfolio outflows in Q408 and a sharp weakening of the currency. Though portfolio flows have since returned and the rand has recovered most of the ground lost since March 2009, the combined impact of global recession and a domestic cyclical downturn will be more broadly felt in 2009. Fitch’s earlier forecast of recession has been confirmed, but the agency now forecasts that GDP will contract by 1%-2% in 2009.

Revenue shortfalls mean the budget deficit could approach 6% of GDP in the current fiscal year (FY09: April 2009-March 2010) and remain high, albeit declining, in the subsequent two years. Fitch therefore expects the government debt ratio to rise from a low of 27% in FY08 to around one-third by FY10. External debt ratios are also forecast to rise as borrowing is stepped up to finance public sector investment and the current account deficit (CAD).

Several years of prudent fiscal policy give South Africa fiscal space to weather a temporary increase in the budget deficit without the debt ratio exceeding ‘BBB’ category medians. However, the increase in debt of the broader public sector, which includes non-financial public enterprises, will be much starker, as infrastructure spending is stepped up. In the longer-term, this investment will help the country ease some of the structural constraints to a higher growth potential, which will be key to improvement in the sovereign rating.

Falling inflation and slower private credit growth in response to earlier monetary tightening is also allowing a monetary stimulus. Interest rates have been reduced by 450 basis points since December. This will help support growth in H209 and into 2010. In addition, due to tighter regulation and supervision, the South African banking sector has been relatively insulated from the global credit crunch and although banking sector asset quality and profitability are worsening in the economic downturn, the sector is better placed than most “BBB” country banking sectors to support the recovery.

Some of the imbalances in the economy are starting to ease, with credit growth slowing sharply and domestic inflationary pressures abating. The CAD is also forecast by Fitch to narrow, though to a still relatively high 5%-6% of GDP. As this will not be fully covered by increased public sector borrowing and foreign direct investment, financing will still rely on portfolio flows, presenting a persistent risk to macroeconomic stability given continued volatile global risk appetite. High wage pressures also present a challenge to public finances, inflation and competitiveness.

A smooth political transition after the fourth post-apartheid general election, the most vigorously contested so far, has reduced short-term political uncertainty, strengthened democracy and should ease investor concerns as the country navigates the downturn. However, political risk has not diminished completely. Expectations have been raised and sporadic riots are a reminder that service delivery, which is a priority for the new government, has the potential to threaten political stability unless effectively addressed.

South Africa’s ratings could come under further downward pressure if economic recovery is weaker and more protracted than Fitch currently expects, leading to a worsening of key credit indicators. A weakening of the policy environment would also be ratings negative. However, if the country navigates the downturn over the next 12 to 18 months without a sharp deterioration of its credit metrics and with macroeconomic stability intact, the Outlook would be revised to Stable.

Contact: Veronica Kalema, London, Tel: +44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, http://www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.”

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G-2: US deficit worries Beijing more than Washington

July 29, 2009

US-China Strategic and Economic Dialogue.  Source: Google Images

In the first official meeting of the US-China Strategic and Economic Dialogue this week, which puts the Democratic stamp on the brainchild of Hank Paulson, Bush’s Treasury Secretary, Chinese Finance Minister Xie Xuren called on the U.S. to reduce its widening fiscal deficit.  In response, U.S. Treasury Secretary Geithner assured the Chinese that, once growth resumed, the Obama administration would do just that.  See today’s NYTimes article on the subject.  Yet a recent Economist article emphasizes the inconsistency of this goal with Obama’s laser focus on health care reform, which many believe will not be deficit-neutral.  The Chinese worry about the value of their massive holdings of U.S. treasuries (appx. $1.5 trillion).  Fiscal profligacy would mean dollar weakness.  One wonders why in the middle of a financial crisis, U.S. lawmakers feel that universal health care is so important, so much so that they are willing to risk U.S. sovereign creditworthiness.  Obamanomics is like Reaganomics in reverse.  Reaganomics argued that tax cuts and massive defense spending hikes would ultimately lead to higher revenues and a balanced budget.  Not very likely.  Obamanomics argues that fiscal stimulus and health care reform that reduces costs will yield more robust GDP growth and therefore room to cut deficits over the medium term.  Wishful thinking.  I guess Democrats understand that their massive legislative majorities will not continue forever, so they had better get their pet projects done now or never (including getting Judge Sotomayor confirmed).  Hopefully, America’s standing in the world, and therefore the value of China’s foreign exchange reserves,  will not suffer as a result.

Obama: Too busy for Israel?

July 28, 2009

Netanyahu and Obama smile for the cameras.  Source:  Google Images

Great op-ed by Aluf Benn, diplomatic editor/correspondent for Haaretz, in today’s NYTimes.  He asks, Where has Obama been on Israel?  Why hasn’t he spoken to Israelis directly, the way he has addressed everyone else from Ghanaians to Egyptians, Europeans to Latin Americans?  For sure, he is really busy, probably busier than any other president since FDR.  As he himself has emphasized, there is the bank bailout, the trillion dollar fiscal stimulus, two wars (one to wind down, one to wind up), a failing state (Pakistan), and health care reform (is that really necessary right now?), not to mention the controversy over the arrest of a Harvard professor who is a friend of his.  Yet he has said he is the one who can untie the Gordian Knot of the Arab-Israeli conflict by the power of his personality and the credibility he has in the Muslim world.  Well, Aluf Benn argues that he is losing credibility with Israelis, a key player in the conflict.  Moreover, he points out something important and elusive to most world leaders.  The difference between playing to American Jews and playing to Israelis.  You don’t have to go on and on about the Holocaust and link it to the Arab-Israeli conflict to placate Israelis.  Just visit Yad Vashem and then deal with the here and now.  American Jews are more interested in politicians reiterating their angst about the Holocaust than are Israelis.  Israelis prefer to hear about a plan to deal with Iran’s emerging nuclear weapons capability, about Hamas rockets in the south and Hezbollah rockets in the north, and about Israel being recognized as a Jewish state by the Muslim world.  Have a read…

Corruption in China: Rio Tinto’s Turn

July 14, 2009

Claude Rains as Captain Renault and Humphrey Bogart as Rick Blaine in Casablanca.  Source: www.availableimages.com

“I’m shocked, shocked to find that gambling is going on in here!”

These were the words of Captain Renault, Vichy France’s chief gendarme in Casablanca (played by Claude Rains), when asked by Rick Blaine (played by Humphrey Bogart) why he was closing down Rick’s casino.  (See photo above.)  Shortly thereafter, the croupier hands Captain Renault his gambling winnings for the night.  In fact, Major Strasser of the Third Reich had ordered Renault to close the casino due to the boisterous singing of the “Marseillaise,” France’s national anthem.

This is the kind of cynical surprise one feels upon learning about the corrupt business relations between Chinese elites and executives of foreign mining companies.  The New York Times reported yesterday that Chinese authorities have widened the investigation into corrupt practices in the mining industry beyond the four employees of Anglo-Australian mining behemoth, Rio Tinto, detained last week.

Transparency International ranks 180 countries on perceptions of corruption,  i.e. business professionals are polled on how corrupt they believe these countries are.  China is tied for 72nd with seven other countries (Bulgaria, Macedonia, Mexico, Peru, Suriname, Swaziland and Trinidad & Tobago).  That is, seventy-one other countries are perceived as less corrupt than China.  One notch worse than China is Brazil; two notches worse is India; and thirteen notches worse is Russia, tied for 147th on the corruption scale with Syria, Bangladesh and Kenya (i.e. only 33 countries in the world are perceived as more corrupt than Russia).

This is all to say that China, though the least corrupt of its fellow BRICs, is still characterized by pervasive corruption.  Notwithstanding the executions of high-profile officials convicted of corruption, China remains challenged to reduce corruption in its society, which distorts its economy and restricts growth by allocating resources sub-optimally. Capital, labor and technology are directed not necessarily to sectors with the highest returns, but to those where connections and payoffs are made. 

One wonders why the Chinese authorities are singling out Rio Tinto?  Why not fellow Australian mining giant, BHP Billiton?  Why not Brazilian mining behemoth, Vale, aka Companhia Vale do Rio Doce or CVRD?  These firms have all pushed Chinese steel makers hard in the past by raising iron ore prices.  China is not only the world’s largest producer of steel, but also a huge consumer, fuelling its distorted capital-intensive, investment-intensive breakneck growth of the last two decades. 

What China needs in order to reduce corruption is not more high-profile capital punishment cases, but a free press and an independent, de-politicized judiciary and police force that will fairly implement and adjudicate the law.  Monopoly rule from the top makes it hard to develop such institutions.

Until and unless such institutions are allowed to flourish, we will continue to be “shocked” by the “gambling” going on in China.

Clash of Civilizations in China?

July 10, 2009

China's Xinjiang Province where Muslim Uighurs live   Source:www.chinatouristmaps.com

Time to re-read Huntington?  His controversial and path-breaking Foreign Affairs article of 1993 and subsequent book posited that the post-Cold War era would be one of conflict and “fault line wars” among the world’s major civilizations:  Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, and Latin American and possibly African…

Is the current unrest in China’s western Xinjiang Province that my colleague David Kampf highlighted in a recent post one of the fault line wars at Islam’s edge?  In its western colonial expansion, China conquered this province in 1759 and incorporated it by the end of the 19th century.  Today, a New York Times article reported that Beijing has banned political gatherings that occur in mosques in the major city, Urumqi.  The province lies in Central Asia, which is a border region between the Confucian, Orthodox, Islamic and Hindu civilizations.  (Look at the map above.)  Countries with sizable Muslim populations, including Pakistan, India, Tajikistan, Kyrgyzstan, Kazakhstan, Afghanistan, either border Xinjiang or are close by, as are Russia and Mongolia.  

Of the conflicts in the world today, many of them smack of Huntington’s civilizational conflicts, others do not, and still others involve such cultural elements in some ways.  Orthodox Russia’s disciplining of Orthodox Georgia may not appear to involve a clash of civilizations, but Bush’s Western civilization was perceived as trying to add Georgia and the Ukraine to its team.  Likewise, Abkhazia, with its Muslim Abkhaz minority, was used as a pawn by Russia to cut Georgia down to size.  The conflicts in the Middle East seem civilizational (especially between Israel and the Arabs), though some, e.g. between Sunnis and Shia and Sunnis and Kurds, look to be intra-civilizational.  The conflict in the Sudan looks to be a civilizational one between Islam and sub-Saharan Africa.  President Obama was in Russia trying to smooth over the civilizational conflict between the West and Orthodox Russia, in an effort to join forces in another civilizational conflict, the one to prevent Muslim Iran from getting the bomb, technology it received from its civilizational brethren in Pakistan (A.Q. Khan) and from the non-civilizational ideological relic of the Cold War, North Korea.  Even in Iran, which is experiencing civil strife, there is a civilizational element — a conflict between reformists who want to cooperate with other civilizations and hard-liners who want to lead Islamic civilization in a confrontation with the West.

Theories always simplify our complex world, but Huntington’s is compelling nonetheless…

Barack Obama: Naif or Visionary?

July 7, 2009

President Obama in Prague earlier this year calling for nuclear disarmament.  Source:  www.guardian.co.uk

Slip back for a moment to the early 1980s.  The Reagan administration was talking about a winnable nuclear war.  Reagan himself called the MX missile the “Peacekeeper Missile,” a powerful multiple warhead nuclear weapon some interpreted as an effort to obtain a “first-strike capability.”  Orson Welles, that powerful cinematic presence, ambled up to the podium, with the assistance of a cane, on a sunny day in Central Park in June 1982, to address thousands in the Nuclear Freeze movement.  Activists opposing Reagan’s foreign policy, including this blogger, marched from the Lincoln Memorial to the Pentagon in 1981, chanting “No draft, no war, U.S. out of El Salvador!!”  When mounted police trotted alongside the marchers, some began chanting, “Free the horses!”  It was the 1980s, but we wished it was the sixties.

Obama has said he came of age during the Reagan presidency.  So did I.  For many years, I wore a T-shirt I purchased at the Nuclear Freeze rally that had a picture of our blue planet on it, with words above, “Don’t Blow It!”

Barack Obama, spending his last two college years at Columbia University, wrote an article in 1983 profiling two anti-war groups on campus, which is attached and currently making its way around the web.  In addition, he wrote a paper for a poli sci class, for which he received an ‘A’, on how he would negotiate nuclear weapons reduction with the Russians.   This week he will have a chance to implement that paper.  Dreams come true for some of us.

A NYTimes article today explains how Obama’s thinking on nuclear weapons has evolved over the years since that article and poli sci paper.  It suggests that at core he, like Reagan ironically, wants to eliminate nuclear weapons from the planet.  (Read his Prague speech on the matter.)  Yet today, he’ll settle for negotiations with the Russians for nuclear weapons reductions and for efforts at non-proliferation. 

He is a remarkable fellow, our president, with so much confidence and affability that he convinces people to do things.  This is a presidential quality.  A quality W woefully lacked.  I am impressed by the fact that the Russians, in advance of Obama’s trip, have agreed to allow U.S. military overflights to resupply NATO in Afghanistan.  Gobama!!

I just hope that over the years since the early eighties, Obama has come to grasp the complexities and ironies of interstate relations and the way nuclear weapons factor in to whether states make war or peace.  A study of these issues can be emotionally-unsatisfying, especially to a utopian wishing to put an end to the “twisted logic” of national security, bemoaning the “academic discussion of first versus second strike capabalities,” and attempting to confront “the relentless, often silent spread of militarism in this country.”  It’s okay, Mr. President, we all wrote like that in college.  

For the record, militarism is what happened in pre-World War I Germany, as the German General Staff, backed by the Kaiser, virtually hijacked that country; it is not at all what has taken place in America since George Washington turned down the opportunity to become a military dictator. 

The question is, now that Barack Obama is the leader of what he called in 1983 the “military-industrial interests, as they add to their billion dollar erector sets,” can he make the best decisions on weapons systems and force posture that will make the world safer?   

Although nuclear weapons are a horrible reality, they have arguably reduced great power conflict since the end of World War II.  While we hate having this threat hanging over us, it is one of the ironies of being human that it is exactly this threat of mutual destruction that has deterred nuclear-armed states from going to war.   So, President Obama’s goals of reducing nuclear weapons and staunching proliferation make sense, but we must be very careful when talking about nuclear disarmament.  The reality is that if all the peace-loving major powers disarmed, the technology remains out there, the genie is out of the bottle.  Some nasty power some time in the future (need I name names?) could and would build such weapons.  Would we have a deterrent to their use or threatened use of such weapons at that time? Could we develop one quickly? We must tread carefully in this area.  The disarmament and arms control efforts of the liberal democracies in the thirties occurred against the backdrop of Germany’s secret arms buildup, leaving them unable to confront Hitler in 1939.

Furthermore, those of us who opposed the Reagan arms buildup must admit that what Reagan (and George Kennan and Paul Nitze) had hoped would happen happened!  We bankrupted the Soviet Union through an arms race, and that nasty dictatorship withered away.  Was it worth the risk?  Maybe not.  The risk of nuclear war probably increased during the eighties because of the subtle shift in the balance of first strike/second strike capabilities, what Student Obama scorned in 1983.  If rasher men had been running the Soviet Union at the time, they could have interpreted Reagan’s commitment to the MX missile and other weapons systems, in conjunction with statements by such luminaries as Cap Weinberger, as an effort to obtain a first strike advantage, an ability to wipe out your adversary in a first strike so as to sustain only a modest second strike against yourself.

Back to today, the disagreement that Obama has had with his Secretary of Defense, Bob Gates, over whether to modernize our nuclear arsenal, warrants careful consideration.  As the guy calling for nuclear arms reduction and wishing to build alliances through the power of America’s example, Obama does not want to build new “erector sets,” especially when he’s announcing expensive domestic spending initiatives.  Yet it is important for the U.S. to stay at the technological edge in military preparedness, especially as regards weapons that improve defense and deterrence.  I’m not saying that Gates’s initiative is the right one, only that policy makers must choose which technologies will be critical to America’s security and a safer world.  Yet Obama’s priority seems to be, simply, to not build any more nukes.  

The NYTimes article speaks about a class on presidential decision-making at Columbia that was formative for Student Obama, in which he wrote a paper on how to conduct nuclear arms negotiations with the Russians.  I took a course around the same time at Tufts University that was formative for me, called War and War Prevention, taught by Stephen W. Van Evera, now a professor at MIT and author of an important book, Causes of War:  Power and the Roots of Conflict, that I hope Obama and his national security team have studied.  The book’s conclusion: policies that strengthen a nation’s capacity to defend itself, rather than conquer other nations, make the world safer by convincing leaders the world over that conquest is difficult.  So, disarmament doesn’t usher in a safer world, arming with the right armaments, defensive armaments, does.  The book also suggests that misperceptions about this “offense-defense” balance have been a leading cause of wars throughout history, notably the catastrophic World War I.  Therefore, transparency, policy clarity and the disinterested analysis of national security by people outside government would reduce the risks of misperception. 

Ironically, nuclear weapons have bolstered the defense, by discouraging would-be attackers.  It is a depressing thought that the most horrible weapon in history has had a silver-lining, just as the most hopeful prospect – disarmament – has helped cause war.   For a greater understanding of why human affairs involve so much contradiction, we must, alas, turn to Mr. Freud, who last century theorized that two instincts drive human beings – the love and death instincts.  The love instinct (libido) drives us to build and the death instinct to destroy.  President Obama is definitely a builder.  He should just relegate his utopian visions to their proper place on the back burner, so that he can take a hard look at defense policy, formulating one that will promote American security and peace in the world.  The Van Evera book is a starter…