Political shock waves roiling South Africa's economy are continuing to reverberate, with news that a controversial business family linked to President Zuma would sell all its assets in the country and Finance Minister Pravin Gordhan would be charged for graft.
The latest developments could add to pressure on South African assets and aggravate the perilous state of the economy, which is hovering close to recession. The country's sovereign debt is just one notch above junk status.
President Jacob Zuma will face another bid for his ouster today when parties debate a call for him to be removed from office following his "constitutional breach" of failing to repay some of the $16M of public money spent on his private residence.
The scandal is arguably the biggest yet to hit Zuma, who has fended off accusations of corruption, influence peddling and even rape since before he took office in 2009.
Just a few years ago, the so-called BRICS were taking the world by storm with surging economic growth, although it now looks like they risk capsizing it.
China was growing at an average rate of more than 10% a year, peaking at over 14% in 2007. India averaged 8%; Russia 5%; and Brazil and South Africa around 4%. To put that in perspective, the G-7 economies expanded at an average rate of less than 1.4% over the same time frame.
What happened? The commodity- and export-dependent emerging economies have long been prone to booms and busts, as their fate depends largely on the tide of global demand. They also face deep debt problems, political turmoil and major demographic challenges.
The iShares MSCI Saudi Arabia Capped ETF (KSA) is the first ETF with significant exposure to that country - an impossibility until June when Saudi Arabia opened up (limited) direct foreign investment in its stock market.
The ETF will track the MSCI Saudi Arabia IMI 25/50 Index which holds about 50 large-, mid-, and small-cap stocks. Interestingly, the index has 30% allocated to both financials and materials, but just 1.4% to energy stocks - it makes sense considering the country's oil production is state-owned and not publicly traded.
The next step for Saudi Arabia could be inclusion in the MSCI Emerging Markets Index - a possibility as soon as June 2017, according to the WSJ.
Entangled in the Greek debt crisis, few European policymakers had little time or interest to pay attention to the recent summit talks between the leaders of Brazil, Russia, India, China and South Africa, collectively known as the BRICS.
The hotly discussed New Development Bank was reported to have just held its first board meeting and will soon be lending internationally. The BRICS Bank will start off with a capital of $50B which will be hiked to $100B in two years.
Meanwhile, the combined economic output of the BRICS last year almost matched America's GDP. Back in 2007, the U.S. economy was double that of the five nations.
Russian President Vladimir Putin ratified an accord Saturday to set up a $100B reserve fund for the so-called BRICS nations, aimed at reshaping the Western-dominated international financial system centered around the IMF and World Bank.
China is poised to provide the largest share of $41B to the pool, while Russia, Brazil and India will provide $18B each. South Africa is set to chip in the remaining $5B.
President Obama is expected to announce a $14B commitment by U.S. companies to invest in construction, clean energy, banking, and information technology projects across Africa.
"These investments will deepen U.S. economic engagement in Africa, fueling growth that will support broader African prosperity and emerging markets for US businesses, which will support jobs in both the United States and Africa," says a White House official.
The announcement will occur at the U.S.-Africa Business Forum today, part of a three-day Africa summit in Washington.
The IMF praised the formation of the New Development Bank and reserves fund launched by BRICS countries (Brazil, Russia, India, China and South Africa) yesterday, and announced that it would like to work together with the monumental project.
So far the new fund has pooled together $100B in reserves from the five countries with the intention of reshaping the Western-dominated international financial system.
The long-awaited New Development Bank has been launched after BRICS (Brazil, Russia, India, China and South Africa) leaders put their finishing touches on the $100B bank and currency reserve pool aimed at reshaping the Western-dominated international financial system centered around the IMF and World Bank.
The launch marks the first big accomplishment by BRICS countries, which account for almost half the world's population.
The bank is scheduled to start lending in 2016. Membership is open to other countries but the capital share of the BRICS cannot fall under 55%.
In order to draw the necessary capital to pull emerging markets out of their swoon, real interest rates have to go higher, says Citigroup. A near-doubling of the benchmark rate in Turkey last week only pulled one-year borrowing costs up to 3.6%, less than half the average in the thee years prior to 2008. The real yield in Mexico (EWW) is about zero. In South Africa, it's 1.4% vs. 2% over the past decade.
“When you have low real rates and try to finance your current-account deficits, it usually won’t work,” says Citi LatAm strategist Dirk Willer. “If the U.S. is repricing for higher rates, it’s very difficult for you to get away with lower rates. South Africa (EZA) and Turkey (TUR) are not safe yet.”
“International monetary cooperation has broken down,” says India central bank boss Raghuram Rajan, a day after the Fed boosted the size of its taper and made no mention of melting-down emerging markets. Rajan joined counterparts from Turkey and South Africa this week in boosting rates to try and stem the slide in their domestic currencies.
"The challenge is brought on by their own domestic policies," says former Fed Governor Randy Krosner. "It's unfair to say it's all the Fed's fault."
Back in his IMF days in 2011, Rajan authored a report calling for the formation of a committee composed of representatives from the major central banks who would report on the spillover consequences of their individual policies. Good luck with that one.
Emerging markets are getting a respite today amid a big rally in the West (of the West is rallying because of a respite in emerging markets).
Who could have thought raising interest rates 425 basis points would be bearish? A curious rally following Turkey's defense of the lira - it jacked rates to 12% from 7.75% - has completely reversed. One feels a 1992-like vibe where the Bank of England hiked like crazy to defend the pound, but then ultimately had to let it go (also creating a bottom in stocks).
In Europe, the Stoxx 50 (FEZ) is off 1.3%, with Turkey (TUR) now down 2.3%.
South Africa joins the party, unexpectedly hiking its benchmark interest rate by 50 basis points to 5.5%. EZA -2.8%.
A check of Brazil (EWZ -1.3%) and India (EPI -1.1%) - where monetary policy has also been tightened this week - finds them lower as well.
The money is flowing into U.S. Treasurys which continue a big 2014 rally. The 10-year yield is off five basis points to 2.71%. TLT +0.3%, TBT -0.5%.