'Zero foreign investment in SA'

This is also the key factor set to keep the rand under pressure over the medium term, and also makes equities vulnerable as foreigners choose to dis-invest and seek out safer havens.

Of concern is that South Africa's external vulnerability is increasing.

The latest edition of Lehman Brother's Damocles model - an index of external vulnerability - shows that that one year after the start of the July-August 2007 credit crunch, emerging market economies are becoming more vulnerable to external shocks.

The latest edition shows a significant increase for many countries, with the largest rise in the overall index since 9/11.

Damocles, of course, refers to the Greek legend of the sword of Damocles and refers to imminent and ever-present danger and a sense of foreboding brought about by a precarious situation.

In similar fashion, SA's current account deficit a sword of Damocles, hanging over the country's head by a single horsehair.

Portfolio flows are not of the more sticking type in the face of global headwinds, thus making the position as precarious as the sword that put Damocles off the "good life".

'Zero FDI for SA'

More "stickable" foreign direct investment flows were seen in the first quarter, but Lehman Brothers notes that on a 12-month rolling basis foreign direct investment (FDI) into South Africa is essentially zero as the multinational nature of corporates investing abroad cancels out any inflows.

Thus portfolio investment outflows have had to be compensated by increased inflows of "other" - largely foreign credit - investments.

"South Africa's reliance on portfolio investments is especially worrying at a time when global equity markets are under such pressure," they say.

"In our view, FDI flows are also in danger if the fall in global mergers and acquisitions and tighter transaction financing are any indication.

More concretely, portfolio flows appear to be at greatest risk in the short term even though stock markets have fallen markedly across the region this year and portfolio flows have already fallen.

Worse yet to come

But worse could be to come. After a steady increase of flows into emerging market equity funds over the past five years, 2008 net inflows have been almost zero.

There may well be a much greater reduction in these flows as investors start to doubt the ability of EM economies to 'decouple' from growth concerns in the developed markets," note the analysts when looking at emerging markets generally.

South Africa's current account deficit hit a new record of R194.7bn in the first quarter of 2008 from the R157.7bn seen in the fourth quarter of last year.

The previous record was R163.3bn, set in the third quarter of last year.

SA deficit hits record

As a percentage of gross domestic product (GDP), the current account deficit was recorded at a whopping 9.0% in the first quarter from 7.5% in the fourth quarter.

The negative imbalance on the service, income and current transfer account with the rest of the world widened further, albeit at a slower pace, to a record deficit of R133.2bn.

Interest and dividend payments in 2007 and the first quarter of 2008 was seen accounting for more than 40% of total service, income and current transfer payments compared with an average ratio of 34% during the period 2004 to 2006.

Strong inward investment in SA equity and debt securities in recent years has led to higher interest and dividend payments, highlighting the negative flipside to strong short-term flows.

This is why direct investment without a canceling out by corporate investing abroad with less of a need to service foreigners will be the key to survival long term. A more protracted global slowdown until the end of 2009 could be a serious risk on SA's landscape.

- I-Net Bridge