Cees Bruggemans: SA economy in 2015 – it all depends on the Fed, Russia and oil

In his superb assessment of next year’s prospects for SA, independent economist Cees Bruggemans concludes that as usual, there is little that locals can do right now to change the future. How our businesses, our incomes, our savings perform next year depends far more on Janet Yellin, Vladimir Putin and OPEC than on domestic actors. So how are their offshore forces likely to influence us? Cees offers some rational insights. – AH

By Cees Bruggemans          

currency tradingSouth Africa at the end of 2014 finds its external accounts influenced by three major global forces, namely the Fed, oil and Russia, in addition to domestic dynamics governing rating agencies and markets (mainly electricity tightness,  labour union disruptions and macro fiscal and monetary discipline).

The latest events shaping our Rand, inflation, interest rates and financial markets are policy resets at the Fed and in Russia, against an oily global backdrop.

The oversold Rand and financial markets may bounce as a result into yearend, but does it dramatically change the 2015 prospect of a weaker Rand and higher SA rates?

Probably not.

So are we offered a festive breather? That could well be, its length dependent on how long it will take global markets to change their views on what’s playing once again. Shelf life here tends to be short but it may see us through the Xmas season.

Yes, the Fed will probably start raising rates in 2015 as labour slack diminishes further and the transitory inflation impact of lower oil prices fades. But NO, it might not be soon, so be patient (for a considerable time still….) as US inflation remains low and might take time to lift, the start to rate hiking being entirely data dependent and opportunistic, but likely to remain very gradual, reflecting the nature of the US recuperation.

A mouthful, but then Fed chair Yelłen puts a lot of nuances to work that succeed in getting a room full of high powered financial journalists to put very varying interpretations on her messaging, with a much larger audience of watching analysts and economists globally not doing anything different.

The Fed message was interpreted as dovish by equity markets, jumping on the news, and was seen as preparing the way for higher rates by bond markets, raising medium and long bond yields, thereby being Dollar friendly.

The Fed is preparing its start, yet offering delay tactics without saying it will be indefinite. And reinforcing the notion it will proceed very slowly.

Market observers, participants and analysts all offer different takes on that, but what matters is what the chair and incoming Voting Fed Doves are thinking.

This latest Fed policy reset will probably serve to keep markets risk-friendly through the festive season, but beyond it will probably invite recurring bouts of questioning, fretting and self-doubt as to how quick and fast the Fed will act. That cannot be helped, seeing that US rates will likely start rising in 2015, and its growth recovery likely will keep progressing nicely, even if its inflation revival will lag and be slow.

This transitionary support from the Fed was further reinforced by transitionary Russian noises yesterday in response to the recent fearful free fall into crisis.

Reinforcing the forceful Monday night decision by its central bank to jack Russian rates by 6.5%, from 10.5% to 17%, yesterday saw a slew of aggressive administrative actions meant to bolster the banking system and Rouble.

Banks saw mark-to-market of portfolios rebased to Rouble values pertaining in the 3Q2014 by policy dictat, making the slide in loan values less steep and less demanding of being addressed. Simultaneously, the Russian finance ministry sold off a large quantity of Dollars while telling state companies to manage their forex exposures more tightly. No actual capital controls but sounding like a form of soft capital controls.

More importantly, these administrative actions came ahead of the key Putin policy speech to be held later today. If the gist thereof is anything like the Putin speech of 4 December, updating the Russian parliament and high officialdom, it would suggest no change in the underlying fundamentals.

Is Russia prepared to change course on Ukraine (and Crimea) beyond mere stealth? If not, Western sanctions will bite yet harder, deeper very shortly. Not so much Europe’s (which is ruefully counting the cost daily and trying to stay out of harms way of the swaggering Russian ship of state), but certainly American ones (scenting blood and not above squeezing hard on soft tissue, the old Texan way).

It is yet to be shown, though, whether the Putin mind & heart is prepared to follow as compared to digging in. Every reaction so far reminds of the apartheid death struggle in the 1970s and 1980s (and less prosaically of the Soviet communist death struggle of the same decades).

The world view is flawed, the policies costly, yet they persist, resist pressure, make things worse for themselves, and then get blown away. All of which takes time, lots of it.

With Putin apparently fixedly determined on the main strategic issues, and while his popularity survives (all Great Russians being in this together), there may be some distance to go.

And in typical fashion they claim to be using market instruments and forced to stabilise things, while actually trying to direct and sell themselves out of trouble, apparently thinking they have enough hard currency reserves to do so.

With $400bn still in hand, and bank and corporate debt redemptions in 2015 a mere $100bn, the wolf could be kept from the door PROVIDED capital flight can be kept to a minimum (soothe those brows) and transaction leads and lags contained (keeping a firmer eye on state company forex transactions).

None of this addresses the underlying issues, or the lack of confidence, the search for circumventing the rules and the wish to leave the sinking ship.

The Rouble may have bounced back yesterday to 60:$ after seeing 80:$ from 35:$ six months ago, but is that temporary relief, as transitory as the market reading of the Fed message and chair Yelłen signaling?

Besides foreigners holding off (except a few brave speculators wanting to buy oversold Russian paper), with Western sanctions yet to bite deeper if Putin stealth maneuvers are found unacceptable, it is Russian market participants that will continue to keep generating the collapse-from-within pressure, draining away precious forex reserves as the Putin regime attempts to hold onto power.

These stabilizing administrative Russian actions should bring short-term relief to risky global assets (“Fragiles”), reinforcing the Fed effect this week.

But into 2015, both these parties may invite market testing, reconsideration and new build-ups of pressure, US bond yields set to rise along with the Dollar while the Rouble is likely to resume its slide, reflecting draining Russian forex reserves.

Overall, oil prices may have rebounded back to above $60 this Xmas season, but a further dip in the opening months of 2015 could still occur, as global demand, supply and geopolitical calculation are yet hardly finished with playing out.

So Rand and SA market reprieve from oversold levels in the jolly season even as we discount lower priced oil in our Xmas socks.

New pressures resuming in the new year, though? Along with the many domestic ones that haven’t gone away, merely lying low over Xmas? Not a boring prospect, certainly a trying one.


* Cees Bruggemans is the consulting economist at Bruggemans & Associates. His website is at www.bruggemans.co.za and email [email protected]


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