Summary

Peter discussed how South Africa saw a very severe lockdown at the end of March and then a slow steady unlocking throughout Q2. Big challenge getting tourists in despite international borders opening up. The department of Health isn’t expecting a full second wave until next year and they don’t expect a vaccine to be available until H2 2021. The government has very little capacity to add stimulus to the system. Credit conditions are tightening as banks are seeing a certain amount of crowd funding through the government issuance. Its difficult for a recovery to be sustainable with tight credit conditions and limited real stimulus hitting the ground. Peter is therefore negative overall expecting a 8.9 fall in GDP this year. After any crisis in South Africa they will have, as they usually do, a very capital intensive recovery – when what they need is a jobs intensive recovery. A real challenge will be all the lost jobs going forward, expect over one million jobs to be permanently lost. On the stimulus 500 billion rand was announced in April and when you break this down the multiplier effect will make this just 6% used to actually grow GDP. However, this will be even lower as the loan guarantee schemes are being use to save SMEs. Peter has worked out that only 1.8% of the stimulus is fed through the system. Monetary policy is heavily constrained by the SARB stance who remain very conservative not wanting to cut further below 3.5% and have ruled out QE. They are cutting back on infrastructure spend on balance sheet but this is the only lever they can use and ultimately it is not meaningful. Whilst the steep yield curve may look attractive to foreign investors it presents a lot of challenges in terms of funding projects with no guarantee of fiscal help from the state. Peter expects South Africa to have to turn to the IMF for a very large package in 2-3 years. But will they get this?! The fundamentals for reforms in South Africa are difficult to lay down due to the increasing divide between political parties and increasing levels of corruption. Lots of Elections coming up is not going to help speed up reforms. Meanwhile whilst the banking sector has coped very well with the first wave but buffers have been eroded and would struggle more with a second wave of COVID. Zek started his presentation by explaining how the Turkish political system has changed in recent years to a presidential one. Although this gives tremendous power to the president it means that they also need 50% threshold in any election to maintain that power. This forces the government to constantly favour pro-growth policies but which ultimately comes at the expense of high inflation, high current account deficits and depreciation of the currency. Turkey has reached its limits of credit driven growth. The pain the government might need to take in the short term will affect their approval ratings. They tried to control the interest rates and fx rates at the same time which failed and cost a lot in reserves. Zek identifies three major issues with the new economic program: First, sources of growth relative to the current account targets are not aligned. Can Turkey really preserve all the debt redemption and also maintain a current account deficit. Secondly, low inflation has always been a long way down the road with no policy commitments. Thirdly, state banks have taken the role of the central bank in currency intervention which creates opaqueness in monetary policy. There was a huge credit impulse to handle the COVID fallout which has resulted in dollarisation and high inflation. Since July end, loan growth has almost completely dried up and the lira is at record low levels, yet the Central Bank raised interest rates in September and the level of central banks fx funding rate still offers almost zero real interest rate. Turkey needs exports and tourism to recover. Government’s expectation of a 3.5% current account deficit is actually more likely to be 4.9% which should be around 1.9% next year with expected 5% GDP growth. At the monetary policy meeting this week if the Central Bank increase the interest rate by another 150 to 200 bps this will be very positive and will start building confidence and should see equities and the currency appreciate. With the right government policies for the economy the equity of the Turkish banks should do well in the short run. If there is no hike in interest rate it would reinforce long-standing lack of confidence in the CBRT’s ability to do what it takes to defend Lira and fight against inflation.

Topics