Tuesday, March 18, 2014

South Africa joins Indonesia among former favourites

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18 Mar 2014 | Tony Leon | Original Publication:  BDlive

Indonesia, like South Africa, has recently fallen out of favour with investors, writes Tony Leon

ABOUT two years ago, the consensus was that vibrant emerging market economies were "enjoying" a better financial crisis than the declining old economies in Europe and the US.

And then there was China, the world’s second-largest economy, the tide that lifted all boats in the resource-exporting world, including our own. It’s a classic "meme", or a concept or intellectual fad promoted to prominence by economists, pundits and phrase-makers. And, as with other examples of conventional wisdom, they usually require revision before long. Happily or not, we still have some believers in the fading meme, such as Trade and Industry Minister Rob Davies. Only this past week, he again drew attention to the rising figures in our trade account with China, Asia’s dragon economy.

But writing this column on a ship cruising Southeast Asia provides a different perspective. The front page in last Wednesday’s Asian Wall Street Journal, for example, sounded a wake-up call on what Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley, calls the "fundamentally impermanent state of global competition", and the shifts in the world economy as well.

The article, titled "Stocks drop on anxiety about China", provides a laundry list of gloomy data softening the dragon’s roar: the Shanghai composite index recorded its biggest drop since last June, making it the second-worst performing market in Asia after Japan. This in turn reflected the price of copper, the commodity most closely tied to the fortunes of the Chinese economy, falling to an eight-month low. As the Journal put it: "Global investors are taking a dim view of the recent data about the world’s second-biggest economy." This includes dramatically slowing exports, a weakening manufacturing sector and alarm in the country’s financial sector after a Chinese company recorded the country’s first default on a corporate bond last week. Even China’s famed export sector recorded a big hit when last month’s exports fell 18.1% from a year earlier, leaving the country with a rare trade deficit.

Of course, China has a lot of residual firepower, not least its megareserves. But the jury is still very much out on how successful it will be, in such difficult economic circumstances, in retilting its economy from an export-led growth model to a more consumption-driven internal market one.

My trip between Singapore and Jakarta, Indonesia, was less than 1,000km, and yet the difference between these two Southeast Asian nations is as vast as their difference in size. In the first city, you have consumer temples of first world order, bling and opulence, and in the other, the chaos of traffic-choked streets, crumbling infrastructure and a human tidal wave of about 10-million.

Indonesia, like South Africa, has recently fallen out of favour with investors. It has a vast population (250-million) and abundant natural resources. Economic growth of more than 5% a year on average for more than a decade, and burgeoning exports, caused it to be hailed as an emerging economic superstar.

But the narrative changed because the economic script did.

From 2011, it followed a course we know only too well at home: its current account went into deficit, followed by the trade balance and then the currency: the Indonesian rupiah became the worst-performing currency in Asia in 2012, raising the cost of imports and inflation in a country whose economy is largely consumption-driven.

Little wonder, then, that South Africa and Indonesia found themselves in the same bad company in January, when Morgan Stanley bracketed us both in the "Fragile Five" — nations overdependent on foreign currency inflows to prop up their accounts and consequently vulnerable to their outflow. Neither is helped by domestic populist pressures this year, which is an election year for both.

But Indonesia’s finance minister put his finger on the problem of political management. Muhammad Chatib Basri explained that "bad times make for good policies and good times make for bad policies". Productive reforms usually happen when the economic going is tough. If you think back to the introduction of the Growth, Employment and Redistribution strategy, for example, it was a run on the rand that precipitated it.

The insight provided by Sharma, who wrote the book Breakout Nations, is profound. The trick to escaping the trap of flavour-of-the-month economies, he notes, is to maintain good policies even when times are good. In other words, be long-term in your approach and always consistent.

But, he says, only about a dozen countries since the Second World War have moved from underdeveloped to developed, proving just how difficult a leap it is. He also notes that the star economies share another trait: "A charismatic political leader who understands economic reform and has the popular mandate to get it enacted." Are there any candidates in South Africa who fit this bill?

Leon is the author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook: facebook.com/TonyLeonSA

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