With 500 blog entries now under our belt (salut!) we persevere onwards and reexamine South Africa, the impetus being Macro Man’s recent roast–“to summarize, you have a labor market with excess supply and pockets of rapid wage inflation and your most profitable and export-friendly sector cannot seem to increase production to capture that increased demand as much as they should”–as well as a quick check-up on our call made back in March to short rand (ZAR) on strength.  As TMM points out, the essential paradox upon which South Africa’s macro picture rests relates to its widening current account (CA) deficit, which from a low 2.5% of GDP in Q210 is expected by analysts to rise to roughly 4.0% by Q411 despite the fact that its terms of trade have been on a secular favorable sprint during the past decade (correlated neatly, I’d argue, with China’s investment-intensive growth model).  This means that while the rand has enjoyed a nice commodity-fueled run, its strength feeds through to consumer spending and capital projects which in turn require a higher level of imports.  At the same time exports seem hamstrung as unemployment remains sheepishly high, production figures dither and an ever-wobbly ANC ruling party remains ever-wedded to trade unions–a partnership unlikely to inspire any near-term resurgence in the capital account (needed to finance the aforementioned CA gap) which as Macro Man uneasily points out, is basically all portfolio funded (i.e. it can vamoose quicker than DSK from a Sofitel penthouse).  Something has to give, and so far that’s been government debt–once roughly a quarter of GDP and now forecasted by Barclays to rise to roughly 44% in the next year.  With this kind of macro backdrop one could swear that China’s Minsky moment has already come, but alas, the country’s shadow finance sector has stepped in nicely to counter Beijing’s hitherto brake job.  Per the currency inflation continues to be muted versus expectations and growth estimates (3.6%) fall far below not only EM peers, but also where they were prior to the last cycle’s first hike in 2006 (5.1%), such that the consensus seems comfortable with the SARB’s 5.5% repo rate to remain rigid through year’s end.  That said per the Bank’s comments unit labor costs registered 7.7% in Q410, which as Bank Governor Gill Marcus pointed out was the result of high wage settlements (averaging 8.2% in Q111) and poor labor productivity (2.2% in Q410; a further clue into dithering exports?).  Coupled with continued reserve accumulation last month and last year’s outflow easement measures it seems clear that the SARB continues to worry about rand strength, though as the above demonstrates the strong currency may not only be fleeting, but also is surely a red herring when compared with the country’s more fundamental flaws.

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