Monday, June 21, 2010

Weekly Hurriyet Column: For South Africa, the vuvuzelas blow

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. The title is obviously inspired by Hemingway's great novel- not as perfect an ending as The Sun Also Rises, but still one of favorites; one of those novels I wish I could read for the first time again.

Coming to more serious matters, I'd like to apologize for taking some time to post this. I was planning to post it early in the day, but somehow the hyperlinks mysteriously disappeared, and a few of them, such as the digging reference in the second paragraph, were absolutely necessary to understand and appreciate the piece:)
The heat has made me less chatty than I usually am, so on to the column:

If it were not for the instrument from hell and a very disappointing World Cup, I might have never got to look into South Africa’s economy and its currency, the rand.

Originally developed to kill time during boring spells and mentally shut off the vuvuzela noise in World Cup matches, my most recent pastime began to turn rather interesting when I discovered a fascinating relationship: Since the Lehman collapse, the lira-rand exchange rate has been correlated with the VIX index, a measure of the implied volatility of U.S. stock options, often touted as the markets' fear gauge. One of my favorite economics one-liners is correlation is not causation, but when you dig a little bit deeper (but not as deep as Bilica), even more interesting facts emerge about these two currencies and economies.

Most notable is the difference in trade structure between the two economies. South Africa is a major commodity exporter, with 60 percent of the country’s exports (making up 12 percent of GDP) in commodities. Moreover, a significant part of its commodity exports, such as the platinum group and iron core, is used in industrial products and thus move in tandem with the global growth cycle. While the rising price of gold in bouts of risk aversion would somewhat counterbalance, it too is surprisingly cyclical.

Turkey, on the other hand, is a significant commodity importer, with oil accounting for more than 10 percent of the country’s imports. According to a back-of-the-envelope calculation Turkey economists know by heart, a one-dollar fall in oil prices improves Turkey’s current account by about $400 million. The different role of commodities in the two countries’ trade bill means that any movement in commodity prices would push their balance of payments in exactly opposite directions. Given continuing fiscal worries and questions over a double dip recession, both of which could send commodity prices lower, the lira looks better-placed than the rand.

Foreign positioning seems to work in the lira’s favor as well. For one thing, according to Emerging Portfolio Fund Research, or EPFR, a company that collects data on fund flows, real money investors are still overweight in emerging markets despite some selling during the past month. But both EPFR data and banks’ recent polls with their real money clients show that such funds are underweight-Turkey, whereas they are in a more or less neutral position in South Africa.

The relative position of real money funds is reflected in bond markets. Whereas the South African market has seen significant inflows over the past year, inflows into Turkish bonds have been more muted. It is therefore natural to expect the lira to be more resilient in bouts of sell-off, and that is exactly what has happened recently. Despite the bleak global outlook, foreign investors bought net 1.5 billion liras of bonds in May, increasing their share in the total bond portfolio to 10.8 percent. Unsurprisingly, South Africa’s balance of payments is more dependent on portfolio flows, making the rand vulnerable to outflows associated with global risk aversion and volatility.

This is not to say that the lira is shining. As I have argued many times, it seems to be overvalued in almost all measures such as the external financing outlook, internal and external equilibrium dynamics, its long-run real trend, or even the Economist’s Big Mac index. But I have found at least one currency it is sure to pound, at least in times of risk aversion, as it manages to come on top in this tale of two currencies or two-country beauty contest.

By the way, according to the Hear the World Foundation, extended exposure to the vuvuzela can lead to permanent hearing loss.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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