Yesterday the Business Confidence Index (BCI) for June 2013 was released by the South African Chamber of Commerce and Industry, the results were discouraging, showing a drop from May’s 90.4, to June’s 90.2, which is a 4.7 index point drop from the same time, last year.
Apart from a slowdown in Chinese exports of iron ore and coal, South Africa has also been hit negatively by the USA announcing in June that it plans to retire its liquidity enhancement program known as Quantitative Easing (QE) which formed part of American stimulus efforts . In the recent years following the global economic crisis, central banks have been trying to shore up economies by increasing the amounts of cash available, this has included printing more money, buying up mortgage-backed bonds and keeping interest rates low. The markets in recent months have shown to be improving with these measures, all of which may come to naught or at the very least be negatively impacted by such a move.
While some market analysts have declared the drop in the markets as an overreaction by investors, the dramatic effects of the announcement cannot be ignored, more so since emerging markets like South Africa have been the recipients of a lot of the QE liquidity. South African capital markets cannot afford to be hit by instabilities in the global financial markets, not with the current state of the economy. A drop in liquidity on the markets would slow the country’s growth even further, adding to South Africa’s economic woes. Investors in such a climate become more conservative and with businesses needing injections of funds to ride out the current conditions, it doesn’t look like the going will get any easier.
The analysts might have reason to be skeptic about the possible effect of the end of QE in established western markets, but emerging markets are still extremely sensitive to turbulence on the global financial markets. Analysts confident that the end of QE will not spell the end of the global economic recovery are expecting that foreign investors will fill the gap left by the FED. Something the African continent may not benefit from.
With Africa just getting noticed as an investment destination, one has to wonder if those investors will turn their eye to the continent- in which South Africa gets the bulk of foreign investment attention. While our raw undeveloped resources may make us attractive to investors, issues of governance (which can be extremely murky on the continent) provide aspects of risk that make investment less desirable in a recovering economic phase. Foreign investment as a substitute for QE is a prospect most investors aren’t putting faith in, if the fall in the Business Confidence Index is anything to go by.
