Some Positive Steps Taken by Emerging Markets to Quell Inflation

Emerging Markets Rising Inflation

An article published on the Sify website has highlighted increasing inflation in a number of emerging markets over the last year. While this problem is also being experienced in developed markets, rising inflation is especially acute in emerging markets because food tends to account for a much larger percentage of consumer price indexes.

To add insult to injury, many countries are working close to full capacity because investment has not kept up with economic growth, which consequently pushes up wage inflation. Official statistics may actually mask the true extent of inflationary pressures in some cases, but there is evidence that the skyrocketing food and energy prices are seeping through to core inflation (in other words, having an effect on other inflationary factors).

Concern has also been raised in terms of the effect of price increases and the various official responses to the situation. Vietnam reported a year-on-year inflation rate of 25% in May, which has seen a proliferation of labour strikes in reaction to this and growth forecasts have since been cut. China is also experiencing a core problem with rising food prices. Even Egypt has hiked public sector wages by 30% in a bid to prevent social unrest. Indonesia is said to be willing to spend a fifth of its annual budget to shield citizens from energy price increases.

Without a doubt, the inflation pressures being experienced by emerging markets seem much worse than in developed countries. Such a development is certainly worrying, as measures including subsidies, price controls and export bans can only provide short term relief at best, while probably just storing up long term problems for the future.

However, there has been a responsible approach taken by various authorities in many countries affected that is somewhat encouraging. For example, Egypt’s decision to pay for the state sector’s wage hikes by curtailing tax exemptions for firms operating outside of ‘free zones’, imposing taxes on interest earned from Treasury bills and cutting state fuel subsidies.

Indonesia announced recently that it would reduce fuel subsidies by 30%, while Taiwan has decided to abandon them entirely. Continuing the trend, Malaysia and India have also decided to reduce fuel subsidies. The current policies will go a long way towards stabilizing the finances of these countries and help direct necessary resources to other parts of their economies.

While moves by central banks in South Africa to raise interest rates in a bid to quell inflation are generally considered bad news for stocks, when it comes to the long term, it is encouraging to see the increasing credibility that these banks have acquired in battling rising prices. The same policies have been applied by banks in Korea and Chile, which ensures that the responsibility for dealing with inflation is taken out of the hands of politicians.

It is important to keep the threat of inflation in context, as policy makers in some emerging markets insist that the spike in inflation is due in part to a short term supply stock in food and energy that will soon ease as higher prices lead to increased supply. There is merit to such arguments and while recent developments are concerning, inflation should not yet be seen as a ‘crisis’ that poses a threat to the overall attraction of the world’s fastest growing economies.

Some countries have also pegged their currencies to the US dollar and successive cuts in interest rates in the US have made the inflationary problems in these countries worse, while already struggling with their economies in overdrive. How long this policy remains in place depends largely on the economy in question, as well as the priority each central bank puts on inflation control.

In general, local currency appreciation and higher interest rates should really help combat inflation. It is believed that the prospect of currency appreciation will not exacerbate the problems being experienced by emerging markets by pulling in more capital, simply because there a number of emerging market currencies are still relatively undervalued.

Equity investors are concerned about emerging markets partly because of the possible severity of measures implemented by governments in an effort to cool the economy and partly because of the cost pressure that local manufacturers might face as a result of price increases. Of course, another concern is the depreciation in value of future money. However, in places like Latin America and Russia, the recent spike in global inflation has been concentrated in commodities and this has actually helped stock indexes.

While the price of commodities may drop from their peaks, these prices are not foreseen to reach extremely low levels in the near future. This is due in part to the continued demand from emerging markets and the relatively inelastic supply. Thus commodity companies should remain in a profitable position and constitute an attractive investment opportunity.

The information in this article is courtesy of Mark Mobius (“Rising inflation in emerging markets”, Sify Finance, 29 June 2008).

If you would like to buy or sell property in Cape Town's Overberg area, please visit www.realty1capeagulhas.com.

War of Opinions on State of Property Market in SA

SA property market in 'serious trouble'

Tanya Farber June 10 2008 at 12:25PM

A war of words has broken out between estate agents and bond originators as news of a pending property crash gathers force, with price drops from 10 percent to 40 percent predicted.

While some agents insist homeowners should not be swept up in the panic, others are frank that the property market is in serious trouble.

On Monday, the Cape Argus received an e-mail marked "urgent" from ooba, formerly Mortgage SA, which charged that "recent alarmist forecasts by property market commentators" had caused homeowners "undue concern".

Homeowners, they urged, should not be swept up in the "scaremongering" because the current weakness was only a "short-term situation".

The fracas started with a letter from Lew Geffen, head of Sotheby's International Realty South Africa, to his franchise owners in which he predicted the pending crash at a 40 percent decrease, adding that there were 60 percent fewer buyers in the market now than at the same time last year.

While other industry players have lashed back rejecting his predictions, Maurice Levin, PR manager for Sotheby's, has defended Geffen's claims.

"Lew is not afraid to pronounce that the industry is in a pickle. Many agency bosses talk it up because their livelihood depends on it," he said.

Lee Gautschi, owner of Lee Gautschi Properties, said she was "honestly" not experiencing panic-selling in her market.

She did, however, agree that there was a range of negative factors which had dampened the market.

These included the National Credit Act; hikes in interest rates; and "worldwide political trends of recession" that have had an impact on the local market, resulting in lower prices.

Media reports have also pointed to emigration spurred on by high crime rates; xeno-phobic attacks; and other factors such as power cuts, political dissent and corruption in the ANC.

The FNB Property Barometer has indicated that emigration accounts for 12 percent of the total number of homeowners putting their homes on the market, while 21 percent is made up of sellers downsizing due to financial pressure.

The chief executive officer of the Pam Golding Property Group, Andrew Golding, also tried to quell the myths of a property crash.

"The reality is not as gloomy as portrayed in some of the commentary," he said, adding that the residential property market, particularly the middle-class sector, was "characterised by an under-supply and over-demand".

But Marsha Haupt, sales director at Betterbond, had an opposite view.

"At this point there is more supply than demand," she said.

And, according to a franchise agent who did not want to be named, "if (Reserve Bank governor) Tito Mboweni does increase the interest rate by another 2 percent, there will most certainly be panic selling in seven to nine months, whether that trend has begun or not".

He said many agents were also evaluating properties beyond their scope so that they could secure a sole mandate for themselves. However, once the seller had signed, the price began to fall, with fewer and fewer people at show days.

This echoes what Geffen said in his letter. He said attendances at show houses were generally poor, and that "only when the agent has convinced the seller to use the most aggressive parameters, namely 40 percent below asking price, does the showhouse receive 10 couples or more leading to a subsequent sale".

Geffen went further: "All the guns are loaded against us in this market and it will take your own courage and perspicuity in order to survive."

This article was originally published on page 5 of Cape Argus on June 10, 2008

If you would like to buy or sell property in Cape Town's Overberg region, please visit www.realty1capeagulhas.com.

Burden on Property Prices

Coastal Property Prices Somewhat Resilient

An article published in Business Report draws attention to growing concern over the ever-lengthening list of negative factors burdening property prices in South Africa. Reserve Bank governor, Tito Mboweni has made hawkish statements to the effect that the market should expect a repo rate hike of 100 basis points this month, which takes the prime interest rate to 16% and there is chance of a yet another hike of 50 basis points in August.

According to First National Bank (FNB), this would push monthly repayments on a R250 000 home loan over 20 years to R3 478 at 16%, from R2 496 in June 2006, when prime was just 10.5%. Property strategist for FNB, John Loos acknowledges that times in the residential property market are “tough”. The list of negative influences continues to expand, including high interest rates, rising inflation, a slowing economy, the National Credit Act, post-Polokwane unease, the Eskom crisis, Zimbabwe’s political dramas, xenophobic violence and low income yields.

Loos said that, “The list has become significantly longer than previously anticipated and especially interest rate hiking has gone further than we had forecast. As a result, a 21% decline in the value of new mortgage loans and re-advances is projected in 2008 and a period of national house price deflation is now forecast”.

Lightstone Risk Management’s national house price index reflects an annual property inflation drop to 7.8% in April, which is half a percentage point lower than in March and significantly lower than the rate of 14% in April 2007. Lightstone reported that higher value areas seem to be performing the worst and may have moved closer to zero or even negative nominal growth. Furthermore, house price inflation appears to be declining the fastest in smaller provincial markets.

According to the index, “Although nominal house price inflation is still positive, one major difference from last year is the decline in real house price inflation (adjusting for consumer price inflation). Currently, real house price inflation is around –3%, which is significantly down from last year when real house price inflation was 7%”.

Based on external economic forecasts involving factors such as domestic product growth, consumer inflation, disposable income growth and debt service ratios, Lightstone expected the downward trend in national house price inflation to continue and bottom out towards the middle of 2009. There is still a good chance that the low point for national nominal house price inflation will remain positive, although in some segments house prices are likely to decline even more.

In the analysis for January, Lightstone’s indication of national inflation came in at 9.2%. The high value segment, which includes properties priced between R1.5m and R750 000, continued its steep decline, dropping to 6.4%, while the more affordable sector (less than R250 000) continued to outdo the other segments and reached inflation of 24.3%.

As far as freehold property price inflation was concerned, it continued to outperform sectional titles by 3 percentage points. In January, a drop to 10.8% inflation was reported for freehold against 8% for sectional titles. Provincial growth performance in Gauteng for January reached 8.5%, which is lower than any of the other major provinces. The Eastern Cape performed best, with prices increasing by 9.7%.

The growth in coastal property prices, Lightstone found had shown surprising strength until the end of last year, but took a sharp downturn in January, dipping 2.7 percentage points to 8.5%. Growth fell back below non-coastal inflation, which came in at 9.4%,

The information in this article is courtesy of Wiseman Khuzwayo (“Growing list of negative factors burdens property prices”, Business Report, 1 June 2008).

If you would like to buy or sell property in Cape Town's Overberg area, please visit www.realty1capeagulhas.com.