Vulnerable State

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While the alarm bells are not ringing, local and international analysts have voiced some concern over South Africa's economy this month, warning of the country's vulnerability to global fluctuations.

On April 21, international ratings agency Standard & Poor's (S&P) ranked South Africa 11th out of 40 emerging markets on its 2008 liquidity vulnerability index, squeezed in between Lithuania and Ukraine.

Though not directly affected by the fallout from the US subprime crisis, S&P said South Africa was particularly exposed due to its heavy reliance on volatile portfolio inflows to finance its large current account deficit. Last year, the deficit widened to 7.3% of gross domestic product, a 36-year high, and S&P predicted the gap would expand further in 2008.

"Our assessment is that South Africa's dependence on portfolio inflows is likely to continue and that these will remain volatile in the coming months, due to the global environment," Remy Salters, a credit analyst with S&P, told local media.

Backing up the agency's warning has been the strong outflow of portfolio capital so far this year. To date, $545m has left South Africa's portfolio investment funds in 2008, a shift into reverse gear from the $3.9bn of net inflow in the same period in 2007.

Slightly more positive was the latest Morgan Stanley Capital International world index, which showed a 3% rise, flagging a return of global investors to higher-risk markets.

However, according to Paul Hansen, group director of retail investing at investment manager Stanlib, South Africa may not feel the full effects of this increasing confidence. Industrial and financial shares were unlikely to prove competitive, despite being relatively cheap, he said.

Another indicator of potentially difficult times ahead came from consultants Ernst & Young's latest investment management index for South Africa. Released on April 21, the report said there had been a sharp fall in confidence in the country's investment management industry.

The index showed optimism among fund managers had slipped from 100 index points to 77 in the first quarter of the year. The fall was even greater amongst smaller firms, said Chris Sickle, investment management director at Ernst & Young, with that section of the index declining from 89 to 61points.

"The business fundamentals are weaker than for some time, and with expectations that things will get even tougher in the second quarter, along with a negative economic outlook, confidence levels are likely to continue downwards," Sickle told local press on April 22.

Though many smaller firms reported net inflows of funds, larger operators were affected by net outflows, the first time this had happened since 2005, a result of the greater volatility in the market, he said.

In its investor confidence index for April, however, South African firm Sanlam Investment Management (SIM) said most of those surveyed had a positive longer-term outlook, expecting higher returns within 12 months.

Despite the show of confidence, Frederick White, head of research at SIM, said there were many clouds on the horizon for both investors and managers. These included forecasts of declining corporate earnings, reduced outlooks for economic growth rates and the very local problems of electricity cuts and increased interest rates in South Africa, White said.

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