Fragile (Forty)Five

There have been several jokes lately – perhaps in the last 45 days – welcoming the UK to the Emerging Markets’ club, or even to the Fragile Five. Indeed, with inflation in double digits, their currency having lost more than 20% against the dollar since the start of the year to late September and their central bank having to avoid a bond crisis by reluctantly stepping in to be the buyer of last resort, it did feel like they were behaving more like a typical emerging market than one of the G7.

The Fragile Five was a term coined by Morgan Stanley in 2013 to describe Brazil, India, Indonesia, South Africa, and Turkey as being particularly vulnerable to rising interest rates and the reversal of quantitative easing, as they had become too reliant on foreign investment to finance their growth. Fast forward to this year, with the UK slipping into a position in which they were running large current account and budget deficits, they technically also fitted into this definition and their susceptibility to the investment tide going out in 2022 became plain to see.

What is interesting to note, however, is how the analysts are saying that the market has pushed out Liz Truss after just 45 days in office, leading to their fifth Prime Minister in just six years – also not something typically associated with a G7 stalwart.

What is perhaps more interesting to note is that at least the market has led to swift justice in one the oldest democracies, with the previous PM essentially being side-lined for partying and lying about it, and the outgoing one for trying to commit economic atrocities.

If we look at the countries that formed the original Fragile Five and other Emerging Market examples such as Venezuela, Zimbabwe, Russia and even China, it seems that for them the wheels of justice turn much slower, if even at all.

In South Africa’s case, we endured President Zuma for nine years (and as deputy president prior to that), while he continued to commit economic and other crimes. In fact, he had been accused of much worse than Boris Johnson before he even came into office. Similarly, Turkey has endured an economic rollercoaster ride under the presidency of Erdogan since 2014 and previously as Prime Minister since 2006, which was the much more influential role of the two until he switched them. Robert Mugabe was president for 30 years in Zimbabwe, leading them through hyperinflation and economic purgatory. President Putin has survived multiple terms in office since 1999 and this month the Chinese Communist Party is seeking to re-elect Xi Jinping for a third term, despite his more dictatorial leanings, as he seeks to become president for life.

So, while it makes us feel less sorry for ourselves witnessing similar political shenanigans in the UK and even the US, at least democracy seems to lead to more hasty resolution in the West. Although with Johnson and Trump both seeking to be re-elected, perhaps not that dissimilar to would-be Chairman Zuma, one must wonder if they are truly that different.

“A market economy is to economics what democracy is to government: a decent, if flawed, choice among many bad alternatives.”

– Charles Wheelan, Naked Economics: Undressing the Dismal Science

“The [UK’s] recession will be long and deep. There won’t be an easy escape. This is most worrying, in our view. The Bank of England assesses the slump will last with GDP still 1.75% below today’s levels in mid-2025.”

– Saxo Bank’s head of macro analysis, Christopher Dembik

Global News

After a mere six, yet tumultuous, weeks at the helm of the UK government, Liz Truss has stepped down, making her Britain’s shortest serving PM. Ahead of this news, columnist Therese Raphael wrote that her leadership was on life support as Tories were struggling to find direction. The new Conservative government got the keys and drove full speed into a brick wall of economic reality, she stated. A new PM may be elected on Monday.
This news will have overshadowed Monday’s announcement by UK’s new finance minister, Jeremy Hunt, that he would reverse nearly all previously stated controversial tax cuts. This includes scrapping the cut for the lowest rate of income tax from 20% to 19%, as well as reductions to dividend tax rates, the reversal of off-payroll working reforms, VAT claim-backs for tourists and the freeze on alcohol duty rates. The reversed tax cuts amount to $36 billion a year.
Truss’ resignation comes as inflation in the UK rose 10.1 percent in September from a year earlier, continuing its steep climb as the island battles rapidly increasing food prices, high energy costs and political uncertainty.
In the meantime, the Bank of England is pushing on with its plan to sell bonds. It feels that recent market turmoil over the fiscal plans has abated enough for this program to go ahead.
Over the oceans, a US recession is certain in the next year, according to a new Bloomberg Economics model, with downturn estimates of the crisis hitting by next October at 100%, up from 65%. This is a blow to President Joe Biden’s economic messaging ahead of the November midterms. Federal Reserve officials have coalesced around a plan to raise interest rates by three-quarters of a point next month. The upside of a 100% probability of a recession is that we can stop debating whether it will happen and look beyond it.
Interestingly however, as traders capitulate, sentiment on stocks and global growth among fund managers surveyed by Bank of America is opening the way to an equities rally in 2023.
As the cost of food, energy and other daily staples shoot through the roof, many Americans could reduce their tax bills next year, according to the Inland Revenue Service. Other parts of the tax code will also be affected by the inflation adjustment. Those include the standard deduction Americans can claim on their tax returns.
Despite the doom and gloom, the rich are spending on luxury goods like it’s the late 1990s. Rich consumers are still buying pricey Chanel handbags, Dior jackets, and Cartier watches in the face of a looming recession and surging inflation and interest rates.
Roche’s quarterly sales fell 6% to $14.84 billion, below market expectations, as a slump in Covid-19 treatments and diagnostic testing outweighed gains from hemophilia treatment Hemlibra and multiple sclerosis drug Ocrevus.
Tesla’s third quarter sales fell short of Wall Street estimates as it blamed delivery and production bottlenecks, which prompted Elon Musk to assure investors that demand for his company’s cars remains strong.
Tencent Holdings is battling soured investor sentiment over concerns over China’s macro-outlook, and its shares, whose largest shareholder is Naspers-controlled Prosus, fell as much as 5.3% in Hong Kong trading on Thursday, setting it on a path to close around HK$235/share — its lowest point since early 2017.
The community of Mango, a decentralised-finance application company, has received back about half of about $100 million stolen after letting the hacker keep the balance. This deal wraps up several days of tense negotiations between the hacker and Mango, which is governed by its community of token holders who vote on any changes.
As at Thursday’s close the S&P 500 was up 2.3% for the week.

Local News

Justice Malala has a positive view of South Africa, saying – with former president Jacob Zuma gone – South Africa can rebuild, despite its many problems. “Over the past few weeks there have been developments in the anticorruption battle which seemed impossible just five years ago. Meanwhile, High court judge Piet Koen has postponed former president Jacob Zuma’s corruption trial over the arms deal until late January 2023. Read all the details here.
President Cyril Ramaphosa has been “mostly nominated” for re-election as the ANC party’s leader in this year’s national elective conference, as more than 50% of the ANC branches in KwaZulu-Natal, Limpopo, the Eastern Cape, and Gauteng have convened gatherings to nominate their leadership candidates. Former health minister Zweli Mkhize, co-operative governance and traditional affairs minister Nkosazana Dlamini Zuma and tourism minister Lindiwe Sisulu have proved to have “some” significant “support”. Read more here.
Attempts to impeach the president over the Phala Phala allegations hinge on whether an independent panel can prove he violated the Constitution or breached laws combatting corrupt activities. It also must prove that Ramaphosa is guilty of serious misconduct.
Although inflation declined slightly in September to 7.5% from 7.6% in August, in line with expectations, the rate of transport and food inflation accelerated by 17.9% and 11.9%,respectively, year-on-year, which hurt already vulnerable members of the public who spend a large portion of their income on food and transportation.
South Africa’s financial watchdog, the Financial Sector Conduct Authority, has classified cryptocurrency assets as financial products, enabling them to be regulated.
South Africa’s fuel imports continue to rise as the country only has three refineries, down from six just three years ago, causing imports to double since 2020, which is raising concerns over a heightened risk to the security of fuel supply. The pending fuel shortage comes as South Africa again implements rolling blackouts of different stages, requiring the intense use of generators.
Forestry, fisheries, and environmental affairs minister, Barbara Creecy, wants the country to turn sunshine into oil if it wants to decarbonise the economy. In addition, she says this may be critical to South Africa’s ability to retain access to lucrative export markets like the EU, which are increasingly looking at restricting imports from carbon-intensive economies as the world targets Net Zero by 2050.
As Transnet inked a three-year deal with its majority labour representative, the United National Transport Union after a three-week-long strike, it is on the brink of becoming the next Eskom. The agreement includes a 6% increase in year one, a 5.5% increase in year two, and a 6% increase in year three. The rail utility is lurching from a labour instability crisis to another financial and operational crisis — at an enormous cost to South Africa’s economy. However, since the deal, worker activity at its operations has returned to levels as high as 80%.
Sasol has declared a force majeure because of the strike at state-owned ports and railway operator Transnet, which has adversely affected the movement of certain feedstocks and products between its operations in the interior and the Durban and Richards Bay ports.
Pick n Pay’s share price slumped 11.2% this week as the market reacted adversely to its high operating costs, rising debt to finance expansion and sluggish growth reported in its interim results. One of South Africa’s biggest retailers, it said same store revenue growth was 7.4%, only marginally above price inflation of 7.2%.
MTN has withdrawn its bid to take over Telkom, sending shares in the fixed-line operator tumbling more than a fifth on Wednesday. It withdrew over concerns that Telkom would not exclusively provide it with services.
The South African Reserve Bank has attached Markus Jooste’s mansion in Hermanus and raided the historic Lanzerac wine estate outside Stellenbosch on Tuesday afternoon. Jooste is accused of having contravened South African foreign exchange regulations in what is possibly the largest corporate crash – and fraud – in South Africa’s history. As a result of his alleged accounting manipulations, Steinhoff investors have lost R200 billion since December 2017. This action against Jooste may assist South Africa when it comes to next February’s greylisting decision.
As at the time of writing, the Rand was 0.4% weaker for the week and the ALSI was up 0.8%.