The impact of volatile commodity prices, exchange rates & interest rates: reflections of a former business economist.

Transcription

1 The impact of volatile commodity prices, exchange rates & interest rates: reflections of a former business economist. SARB Biennial Conference: October 2016 Gavin Keeton Department of Economics & Economic History Rhodes University 1

2 Corporate South Africa in 1990 Dominated by large, diversified groups Almost all had a mining component Diversification: Within mining e.g. gold, coal, base metals In Anglo American s case, also diamonds & platinum Across products i.e. industrial interests & financial services Conglomerates 2

3 Corporate South Africa in 1990 Corporate structure the result of: Association with apartheid made it very difficult for SA companies to operate globally SA exchange controls meant SA companies could not use retained earnings or domestic balance sheet to expand globally 3

4 Corporate South Africa in 1990 Some examples of international diversification Rembrandt/Richemont Liberty International Anglo & Minorco Focus of this presentation is on the implications for monetary policy & exchange rates of product & global diversification 4

5 5 Natural commodity price hedge

6 Product diversification Copper v Zinc Copper v Oil

7 7 Exchange rates

8 Geographic diversification - Anglo American Operating profit * 2006 Net Assets 2006 S America 37% Australia & Asia 4% South Africa 42% N America 1% S America 14% Australia & Asia 9% South Africa 42% N America 1% Europe 10% Rest of Africa 6% Europe 32% Rest of Africa 2% ($9 832m) ($28 342m) * Before special items & remeasurements 8

9 Geographic diversification - Anglo American v Rio Tinto Net Assets Rio Tinto Australia & NZ 57% 2006 Indonesia 2% Africa 4% S America 0.5% Europe 3% N America 34% N America 1% Net Assets - Anglo S America 14% Australia & Asia 9% Europe 32% 2006 South Africa 42% Rest of Africa 2% ($30 372m) ($28 342m) 9

10 Geographic diversification - Exchange rate hedge ZAR/USD & DJ/AIG Commodity Price Index PESO/USD vs Copper Price Commodity prices 80.0 % change ZAR/USD % change Copper Price CLP/USD

11 Geographic diversification - Exchange rate hedge AUD/USD & DJ/AIG Commodity Price Index Euro/USD & DJ/AIG Commodity Price Index Commodity prices Commodity prices % change % change AUD/USD Euro/USD

12 Impact of the exchange rate on an individual project Effective exchange rate of the Rand - Log scale (trade weighted against 20 currencies =100) Nominal (left axis) equilibrium (old) Real (right axis) equilibrium (new)

13 Geographic diversification - Exchange rate hedge Effective exchange rate of the Rand - Log scale (trade weighted against 20 currencies =100) Nominal (left axis) equilibrium (old) Real (right axis) equilibrium (new)

14 Geographic diversification - Exchange rate hedge Effective exchange rate of the Rand - Log scale (trade weighted against 20 currencies =100) Nominal (left axis) equilibrium (old) Real (right axis) equilibrium (new)

15 Merits of forward cover on USD/ZAR (100) 7.00 (200) (300) 6.50 (400) Total Profit/Loss Spot USD/ZAR USD/ZAR Profit/Loss (ZAR) Cumulative Profit and Loss Year 2011

16 Merits of forward cover on USD/ZAR US $ per ounce % Negative Correlation USD/ZAR US $ per dry metric ton % Negative Correlation USD/ZAR Platinum USDZAR Iron Ore USDZAR 16

17 17 Interest rates

18 ZAR Interest rates - when to fix or float? 5yr Fixed Swap Rates vs Comparable (Certain) Floating Rates at Reset Dates Fixed is preferable 17% of the time Dec/00 Dec/02 Dec/04 Dec/06 Dec/08 Dec/10 Dec/12 3m Floating 5yr Swaps Known Rates Known/Fwd Rates Dec/14 18

19 19 Are SA companies as cash flush as is claimed?

20 SA corporates are SA s principal savers 40 Composition of savings (% of GDP) Total Corporate Depreciation Households Government 20

21 Borrowing has increased SA: credit extension to private sector R billions (left axis) % GDP (right axis)

22 So, apparently, has cash in the bank SA: bank deposits - "other companies & closed corporations" R billions (left axis) % GDP (right axis)

23 SA corporates are SA s principal savers 40 Composition of savings (% of GDP) Total Corporate Depreciation Households Government 23

24 Whose cash is it? 17 Cash of JSE Top 40 as % of reported bank deposits