Johannesburg - A recent article in the mainstream international business press that appears to target South Africa as the most vulnerable of 17 surveyed emerging markets - ahead of Pakistan and Venezuela - has come under fire by a local economist.
The article is headlined "Domino theory" and asks the question where emerging-market contagion could spread to next. "Emerging market crises have a nasty habit of spreading as investors flee one country after another," the article says.
Then below that under the caption "If one green bottle should accidentally fall" comes the damning table with SA right at the top of the list of most vulnerable countries.
The research is based "largely" on figures provided by HSBC and pens in a projected -10.4% current account deficit for SA.
Nowhere in the research on the deficit is there mention of the potential for a lower deficit as, for instance, dividends are cut be heavyweights like Anglo. At 40% of the deficit, the net income payments and receipts component of South Africa's balance of payments is the highest, but it looks like the entire thing is based on a potential fall in investment.
It is not entirely certain whether the research was done by an economist based in South Africa, but by all accounts it is having repercussions on the approach of investors who may have been looking at the high yields SA has to offer compared to the developed world.
The other areas of concern noted are short-term debt as a percentage of reserves at 81% and a bank loans to deposit ratio of 1.09 -although both of these are nowhere near some of the levels seen in Hungary or South Korea - which rank as less risky than SA overall in the table.
One-dimensional
Chief economist from Investment Solutions, Chris Hart, says that while he is certainly not the "PR for South Africa Incorporated" and would never "poo-poo" the serious concerns about our deficit, this article appears to be "way off the mark".
"It is too one-dimensional to look at a single ratio," he says.
He notes that economic size is an important element and South Africa's external debt of around 15% is "not particularly high".
"People are still harping back to emerging market crises, while the US and UK are 'going Japanese' with interest rates nearing zero," says Hart.
He says the bigger problem for SA and other emerging markets may actually be to manage potential inflows as foreign investors seek growth and yield.
He is concerned about the quality of the collateral being accepted by the federal reserve in the US and also notes that in some developed countries the banking system has become bigger than the entire economy.
"There is default risk within their own central bank. Taxpayers may be unable to hold everything up," he says.
"The contagion is from them - it is the epicentre of risk in the world," says Hart.
He says while SA's external debt remains low, a country like the US is facing "real" debt at well over 100% of GDP.
"The actual analysis in the article appears to be pretty poor," says Hart.
Even if political risk were added to the mix, Hart finds it hard to believe that SA is "anywhere near" the stage of the risk faced by countries like Russia and Venezuela where the government could take away assets without proper recourse, although he concedes there are "erosions" in South Africa.
Other analysts in SA do not believe the deficit is expected to be as large as the 10.4% in 2009 mentioned in the article.
The National Treasury forecast just in February that South Africa's current account deficit would be at -8.0% of GDP in 2010 from a projection of -7.8% announced in October last year.
It is seen at -7.3% in 2008 from the -6.9% announced in October.
A forecast of -7.8% is set for 2009 from the -7.7% at October. A gap of 7.2% was seen in 2007.
"The current account deficit does raise risk, but the key thing is it is financed by investment and not debt," says Hart. He says serious concerns about SA's deficit should only be raised if that situation did indeed change.
- I-Net Bridge