Turkish crunch triggers SA outflows

Moody’s Investors Service on Friday said that over the past month, portfolio outflows from South Africa have been the largest, out of those emerging markets tracked by the Institute of International Finance (IIF). 

“The emerging market countries that the IIF daily experienced $2.7 billion of portfolio outflows over the week to 17 August 2018 when concerns over Turkey escalated, compared with broadly balanced flows in the first six months of the year,” said Gabriel Torres, a Moody’s senior credit officer. 

“In the month to mid-August, emerging markets still experienced net portfolio inflows overall, although South Africa saw substantial net outflows for both equities and debt.” 

South African assets are usually used by investors as a proxy for emerging markets as a whole. Concerns around Turkey’s refusal to hike its interest rates in a high inflation environment, despite its plunging lira, and risk of full-scale financial meltdown, led to risk-off for many emerging market financial assets, as foreigners fear risk contagion. The Moody’s report looked into the fallout from the correction in Turkey’s exchange rate and asset prices highlight again the external vulnerability and sensitivity to a rise in the cost of debt of some emerging and frontier market nations. The turmoil in Turkey and the increasingly fragile relationship between the country and the US also saw a marked depreciation in the rand with the local currency at one stage breaching the R15 mark against the dollar. 

“The rand has edged up since early August, and it may recover a bit of lost ground over the coming weeks,” said John Ashbourne, a senior emerging markets economist. “But any gains are not likely to prove lasting. EM currencies will remain under pressure due to trade tensions, tightening monetary policy in advanced economies, and concerns about US growth in 2019.” 

Sentiment for South Africa has also waned after the initial boost that came from President Cyril Ramaphosa taking power from Jacob Zuma in February. The economy shrank 2.2 percent on an annualized in the first quarter basis and saw its current account expand to its biggest in two years. The country is also staring at a recession with the available second quarter activity data having come in weak. The rating agency further flagged domestic-specific factors that contributed to emerging markets weakness. 

Amongst the issues picked up by Moody ’s included the country’s relatively high wage settlements in the public sector, and ongoing uncertainty about the implementation of land reform.