Can we still believe our economists?

BCA warns of coming currency bloodbath, while most local economists see the glass half full.

In a previous Moneyweb column I wrote about the unfortunate career demise of a former ‘Big Four’ bank chief economist, considered to be too critical of government’s economic policies.

After several warnings to ‘tone it down’ and be more ‘even-handed’, he was eventually asked to leave, essentially ending his career as an economist in South Africa.

Subsequently, during a round of golf, he admitted that his views, which had carried considerable weight at the time, caused a flurry of phone calls between Luthuli House and the top floor of the bank. No doubt, reference was made during those phone calls of the big business being done between the bank and the government on many levels. It was a no brainer: he had to go to protect these business connections and keep the politicians happy.

Ever since, I’ve been very suspicious of the function of economists and the sanitised messages they send out on behalf of their pay-masters, whether it be a bank, assurance or asset management company.

By and large most of their research reports and press conferences tend to be thinly disguised marketing opportunities for their companies, rather than real economic forecasts.

It may surprise readers that there is no formal economist profession, like that of accountants, doctors or lawyers. Heck, even I could call myself an economist and I will have broken no law.

Yet ‘economists’ play a very central and important role in our media and public discourse.

They are quoted almost daily, commenting on anything from the petrol or oil price to economic variables … as if they were clairvoyants.

There are very few local economists prepared to stick out their necks on matters economic. There are a few exceptions, such as Dawie Roodt, Mike Schüssler and George Glynos, but the rest seem to find safety in consensus. I cannot imagine the chief economist of a large SA asset manager, for instance, advising clients to sell their SA assets to move money offshore, even via an asset swap within the same company; or a large mortgage provider’s property economist warning about the ‘economic quicksand’ of the local property market. Such a move would be career limiting.

Yet it is on these and similar economic and financial market forecasts and pronouncements that major investment decisions are based.

Forecasts fall flat

Considering the tumultuous time we’re having in the markets, globally and regionally, I looked at some of the consensus forecasts of the 33 economists who partook in this year’s Economist of the Year competition, as recently as March 2015. The annual economic forecasting competition is organised by the Bureau for Economic Research (BER) at Stellenbosch University with a large media company.

Our current economic canvass is filled with bad and more bad news. The rand is flirting with 14.00 to the US dollar, the commodity cycle is deteriorating on news of imploding growth in China, and our tax revenues are way behind schedule. Business and confidence indices are at 15- and 12-year lows respectively and a global downgrade of our global debt is on the cards.

Compare this with two rather optimistic overall forecasts made by the economist group in March: 2015’s growth rate would be over 2%, while the consensus for the rand was at R11.80 against the USD. Imagine being an exporter/importer and relying on this forecast to hedge forward your currency exposure? It would have been a very costly mistake to say the least.

And it’s not a case of being wise after the event. For most of 2014 and 2015 many global forecasters and commentators, including myself, have warned about SA being part of the initial Fragile Five (now the Fragile Three), with Brazil and Turkey.

Fragile Five

Morgan Stanley coined the term ‘Fragile Five’ in a September 2013 research document for the Brazilian real, Indonesian rupiah, the rand, Indian rupee and Turkish Lira – calling them: “troubled emerging market currencies under the most pressure against the US dollar.

“High inflation, weakening growth, large external deficits and in some cases exposure to the China slowdown and high dependence on fixed income flows leave these currencies vulnerable,” it stated.

Two years later, the report is eerily prescient – all the mentioned currencies have suffered considerable declines against the US dollar. In the rand’s case the decline was from R10.30 to this week’s rate of R13.90 to the USD – a 35% decline.

Amongst our crop of economic forecasters and investment strategists – who mostly missed this spectacular meltdown – there’s now the dangerous prevailing argument about ‘mean reversion’ and ‘what goes up will come down’, with a leading economic writer commenting recently that the ‘rand always recovers, doesn’t it?’

Morgan Stanley for one would not agree. Anyone who does could well find themselves on the wrong side of the rand/USD trade.

In a report published last month, Morgan Stanley revisited its Fragile Five scenario and added another five countries to the list, mostly at risk from further meltdowns in their currencies, including: Thailand, Singapore, Taiwan, South Korea, Chile, Colombia and Russia.

The common denominators are a linkage to the commodity cycle and China being their top export destination.

Consensus gets it wrong, again

As recently as the end of July, local economists’ consensus forecast for the rand was 12.43 to the USD and 13.25 against the euro by 2015’s fourth quarter. Unless there’s a dramatic turnaround in the rand’s fortunes, this forecast will be out by about 20%.

On expected economic growth, the consensus is 1.9% for 2015 and a very optimistic 2.4% for 2016. Again, this seems out of touch with economic reality and already FNB (not part of the group) has downgraded growth for 2016 to 1.5% – much in line with Moody’s and other global forecasters.

In a comprehensive investment report, dated August 19, 2015, Bank Credit Analysts (BCA), is even more direct and dramatic in its warning of a coming currency bloodbath for emerging market countries. “Economic and financial pain will instigate major political risk over the next 12-18 months. Investors will have no warning when and how these risks are articulated, but they will almost certainly weigh on the markets given the ongoing structural breakdown in financial assets.”

In short, says the BCA, be long US dollar assets and short EM assets, of which SA is one.

It’s long been my view that our local economists operate a sort of economic forecasting cartel. I most certainly have not been using them for my investment decisions and I would advise you, dear reader, to always ask why is x saying what and who do they work for? Therein will lie your answer.

My forecasts

For what it’s worth, here are my forecasts:

  1. The China slowdown has just begun. Avoid commodities, emerging markets and even SA assets, especially bonds and commodity funds. Cash returns of 5 to 8% suddenly look very attractive.
  2. Rand weakness has a long way to go, especially if one compares our productivity and declining levels of foreign investment. We are a capital-hungry country but our government is hell-bent on alienating our largest foreign investors: Germany, Britain, Netherlands and France. These countries have in recent weeks loudly and publicly berated government’s tinkering with the Bilateral Investment Treaties we have with them. Government seems oblivious to these warnings.
  3. As the economy slumps and starts shrinking (recession) government will find reasons to interfere even more, crowding out the private sector.
  4. Government needs to make structural changes (education, labour, regulations etc) to the economy, as the BCA implores. Instead, it will choose the economically popular route to appease the left-wing opposition.
  5. The Springboks will win the Rugby World Cup. Ok, I’m only joking; I was just checking if you read to the end.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at for article ideas and suggestions.


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Interesting. How about the accuracy of the statistics as reported by the ANC? It would be a fairly brave investor to accept them as being 100% correct. I am sure, like the crime stats, they are fudged. To meet someone who is bullish on the Rand and the SA economy would indeed be refreshing. The numbers appear to forecast a dreadful future for Rand investors. Somehow no one seems to factor in the possible Zuma third term as President of SA and the resulting chaos. Mind you it is just about chaos already.

You wanted someone who is bullish on the SA Rand….

Magnus wants clicks – not reality. Bad news sells clicks. Anyone that actually looks at economists forecasts and uses them to make important investment decisions is a fool. Magnus has been doing this for more than 20 years and still looks at forecasts? Worrying. Tell me one person who is consistently good at predicting not only the currency direction but also them quantum of change and the precise timing of these changes…. they don’t exist because it is impossible. The list of terrible forecasts is longer than Atlas Shrugged, Goldmans forecast oil at $200 and now they say it could go as low as $20. No one knows the future, they just have a model in excel or Matlab and throw in different numbers for factors that have historically been important… and these numbers change every minute! Stop pretending like bad economic forecasts are something new or a conspiracy.

I have commented several times on different websites that it would be interesting to see a multi-year comparison between the forecast and reality of the different “experts”. Around every December papers bring out articles about the next years forecasts by different experts, which are nearly identical, but then never ask them why they were way off the year before. I have a suspicion that they have a “top secret” forecast for internal use and one for public use not to upset our political masters.

Agree, like criminal lawyers on opposing sides having lunch together and deciding who is going to win this one. I also would like to ask these bright sparks even 6 months later “What happened?” but they are all in the background. It is one of those shots they call, like political commentators but are accountable to no one. Best if you do your own investing is to read them all then decide who has the least smoke and mirrors, add in your own research and common sense and you may be halfway there.

What use is there in hiding the truth – the fundamentals prevail in the end. If government policies are weakening our economy and the social fabric, no amount of intimidation and coercion will stop the eventual destructive results. It might buy some time for the people mismanaging our economy but is about all.

When the Rand’s value against the USD declines from R10.30 to 13.90, that represents a 26% decline in the value of the Rand, not 35% as stated.

I am confused……13.90 less 10.30 = 3.60……3.60 as a % of 10.30 is 34.95%. It could be argued that the dollar has strengthened by 34,95% so why is the same % not applicable to the rand devaluation. Surely the increase / decrease must relate to the starting figures not the new figure. I stand to be corrected…please

26% is correct. You can’t price rands in rands, you need to use the US$ per rand rate. So 1/10.30 = 0.097 $/R and 1/13.90 = 0.072 $/R, a decline of 0.025 $/R. 0.025/0.097 = 26%.

Andrewb is right. Just think this way, if the rand drops from 10.30 to 22 to the dollar your calculation would show more than 100% drop which is obviously impossible. This kind of mistake is unfortunately very common even among finance writers.

26 % decline is Incorrect – 35 % depreciation is the correct percentage !

R10.3 means R1 = 9.7 US cents
R13.9 means R1 = 7.2 US cents
So Rand depreciated (7.2-9.7)/9.7 = 26% against USD

Yes, an economist’s forecast is less reliable than a weatherforecast.
Fortunately, we are not dependent on it, because anybody with a little common sense can see where SA is heading politically and economically.
The consequence is increasing RISK to your capital/investments/etc.
How to mitigate this? Get as much of your capital out of Zumaville asap to a first world economy.
(Anybody who has had money overseas at the beginning of the year, is already 20% better off against the weakening Rand, and there is more to come in the medium to long term)

Let me tell you this, now. There is a difference between risk that is created by man (exchange rate movements) and risk that is created by nature (e.g. adverse weather). Under the regime of irredeemable currency, we labour under risks created by man. For the elite the risks created in the market by man are not risks at all.

The market future exchange rate of the rand/US$ can be calculated from the differential in the interest rates (this will be the market ‘consensus’ around which economists will gravitate), however, this rarely is the case in reality. Anyone disagreeing with the market consensus is welcome to take a contrary position.

When Morgen Stanley coins the term “fragile five” and the investment bank propaganda arm, Bloomberg, repeat this ad nausium then you know they (and GS, JPM etc) have taken a short position on the rand. The idea is to disseminate information among the holders of “hot money”(SA Bonds) to cause panic and everyone who has been involved in a panic knows that it is best to panic first. There is nothing “eerily prescient” about the Rand’s demise. It was and always will be orchestrated on high.

One the rand has fallen the investment bankers close their short positions and pocket their billions all on the misery of the citizens, especially the poor, who wake up to a world where staples have soared yet incomes have not. This is termed making the country “competitive”.

this is why the US Fed and the establishment hate gold. A gold standard stands in the way of manufactured risk, risk free profits and being able to accumulate billions without producing commensurate wealth for society.

if you were correct that would be a very sad indictment on (i) the markets and (ii) the intelligence of people like you and me who read these types of sites and participate in the market.

in the real world its a matter of connecting the dots and the obvious path for EM commodity countries who have benefitted from the commodity cycle and the excess cash from QE is PAIN AHEAD.

if there is a better scenario please share it ….. south Africans are desperate for a tangible good news story (ie something outside of comrade hlaudi’s domain).

So who’s the big 4 bank economist that was fired for speaking truth to power?

Could his initials be CB?

There was nothing in Cees Bruggeman’s boring diatribes that could possibly offend anyone. If it was him, it must be a case of sour grapes for being forced to retire on attaining retirement age.

As Peter Lynch famously observed, “If you spend 13 minutes a year studying economics, you’ve spent 10 minutes too much.”

In the same way asset managers pick shares based on sound fundamentals and expected growth, economists extrapolate what they can from the data at hand and make calculated guesses rather that accurate forecasts, which everyone interprets in whatever way what they want to, and resultant from that is either loving or loathing these ‘opportunists’

But then Magnus, you go on to make your own supposed ‘forecasts’ which are a farcical, laughable really, nothing but just broad statements and facts that every Moneyweb-er knows from reading articles.
I’m sorry, but those aren’t forecasts, and that on its own, highlights why we need economists.
Remember they are called economists, not psychics or fortune tellers, they can’t see into the future.
Some of your points are valid, but you are blowing this way out of proportion.

I also found his “forecasts” laughable.

But I disagree with you, we don’t need economists any more than we need traditional healers.

The article is headed “Can we still believe our economists?”
Possibly more a case of “Did we EVER believe our economists?”

Please publish a list of the top 10 economists in South Africa. This would help us know who to listen too and who to ignore.

The current deflationary cycle is in its infancy. Do not be surprised to see the dollar index go to 120+.
This will drive the Euro to 80c, the pound to $1.20, the A$ below 50c and the C$ to 60c. They have been there before(2001). The pound was $1,03 in 1985.
Under these circumstances it is not difficult to understand that the rand will be plunging to the denizens of the deep. 20 to the dollar could come very quickly if metals plunge. The rouble went from 32 to 64 to the dollar last year in no time flat.
The cycle will end with a stock market rout, a collapse in low quality bonds and a long term US treasury yield approaching 1%. This will form the base for the next inflationary bull market in stocks and commodities and a secular bear market in US bonds.
Now will be the time to load up on EM assets.

Economists are fools who are paid to rationalize theories they are given.

Posted on behalf of Paul Botha:

Hi Magnus
What a well written article of yours in MoneyWeb.
I could not agree with you more.

I do most of my investing with Investec and had a hard time a few years ago, after having read some of your previous articles, to get them to invest the way I wanted it done.
To date I have moved 80% of my wealth offshore leaving only 20% here. The pain we have to go through with SARS each year makes it really tricky.

I love this country but I also feel the advisors just give us the house rules. In my follow up meetings they keep taking credit for what I instigated and if I had followed their advice I would be much poorer.

Who can we believe these days?

Believe Warren Buffett. He has a miniscule investment in Africa. He is on record, you can google it, as saying his wife’s inheritance will be 90% invested in a Vanguard fund like the VOO (and add the VEA to get world coverage if you feel that way) ETF S&P Tracker Fund. The rest in short term treasury bonds just in case she need cash and the market is down. I am not sure why people are so mystified by investing in the way Buffett recommends. It is cheap, Investec UK will do it for you and you will probably want to be buying when you think things are looking a bit cheaper although as all the fund managers say, timing the market is really hard; they have to say stuff like this to justify their extraordinary fees. Investec UK or similar offshore people will tell you why world markets might be looking cheap or expensive. Forget SA completely it is a dead end Rand denominated long term loser. Those SARS application forms are not that bad to complete, yet.

just follow the money – its heading out of s Africa in a big way. numerous articles have confirmed this

End of comments.



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