Venezuela’s hyperinflation is set to reach an annualised rate of 1 000 000% by the end of this year. As a case in point, populists need not look far for evidence of the dire results of adopting a socialist model. Socialist policies, together with rampant corruption and a hollowing out of state institutions have brought the country – once South America’s richest per capita and the envy of developing nations, including ours – to its knees. That this is a man-made disaster with ready solutions deepens the injustice.
However, experience is the best teacher, and it seems some lessons may only be learnt the hard way. We see a comparable situation playing out in Turkey, where President Recep Tayyip Erdogan’s cronyism and manipulation of the finance ministry, together with a sharp rise in foreign debt and local consumption, has set the country on a steep inflationary course. Currently, inflation is running at 16%, and is set to hike sharply on the back of a 50% fall in the Turkish lira this year. Notably, in defence of populist policies, Erdogan refuses to alleviate this deterioration in economic conditions with appropriate policy measures, instead putting politics ahead of economics.
Lest we forget how interconnected the global economy is, we have a ready example in the rand. South Africa, with its open economy and highly traded currency, caught Turkey’s cold with the rand falling from R13.10 to the dollar at the end of July to as low as R15.50 two weeks later in a sharp emerging market sell-off. The short-termism and populist policies destabilising Turkey and Venezuela have infected us, too. South Africans who had hoped to see an end to late-night, shock statements were given another instalment by President Ramaphosa a few weeks ago when he announced that the ANC will propose constitutional amendments to enable land expropriation without compensation. While the details are yet to be finalised, at least one thing seems to be reasonably certain: the horse, as they say, has bolted. Investors will do well to hang tight!
Listen to CE Adrian Saville discussing President Ramaphosa’s land expropriation announcement with Bruce Whitfield on Radio 702
With an inflation rate that is estimated to run to seven figures, it would seem fair to argue that the true extent of Venezuela’s financial crisis is anyone’s guess. The International Monetary Fund’s (IMF) recent hyperinflation rate prediction of 1,000,000% by the end of 2018 was a revision of an estimate of 13,000% that they made in January this year. Even with this revision, the IMF may still be underestimating the severity of the situation. Venezuelan financial firm Ecoanalitica predicts the rate of hyperinflation will reach 1,400,000% by year-end.
While numbers often hide in a story, the human tragedy of Venezuela lays the figures bare: 1 200 000 People have left Venezuela in the last two years out of a population of 28.1 million 300 000 Children at risk of severe malnutrition 90% Poverty rate 8.6kgs The average weight lost by 75% of the population because of the country’s food crisis
There is an African proverb that says, “when two elephants fight, it is the grass that suffers”. This has been the case for the South African rand, other emerging market currencies and the most vulnerable economies which have been on the receiving end of Trump’s trade war. Through the course of July, South African equities inched lower with the ALSI returning -0.25% while South African bonds edged up 2.2% for the month. Local listed property markets were also muted with the SAPY closing the month -0.5% lower. On the global front, markets rebounded in July from a weak and volatile June spurred by strong earnings growth as well as better than expected fundamentals. Energy stocks were the biggest gainers, rising 13% as concerns rose about oil supply shortages around the world. The technology sector also rallied, driven largely by positive reports from Facebook, Apple and Microsoft. The tech sector recover came about despite Facebook suffering the biggest one-day loss in the US stock market history, as $120 billion of its value was wiped out in one day on the back of a poor trading result.