How not to report on economic matters

An article that damns South Africa as the riskiest of emerging market economies is a good example of how not to write about economics for a popular journal.

The Economist article, titled Domino Theory, published on February 26, used several indicators to compile a ranking according to risk. These seemed mainly to be taken from one financial institution, HSBC.

The Economist found South Africa the riskiest of large emerging market economies.

One of the puzzling things is that the figure used for the South African current account deficit is that it is a forecast, which means it is extremely open to error, and one that seems much too high.

At -10,4 % it is at odds with the forecast of the Economist Intellligence Unit and South Africa’s national treasury. The Treasury expects around -7% for the next few years, mainly because of spending on the public infrastructure programme.

Both Investment Solutions chief economist Chris Hart and Nazmeera Moola of Macquarie First South have detailed objections to the economic methodology.

Like me, they were surprised by the finding.

“I was perplexed,” writes Moola in the Financial Mail. “The current account deficit is SA’s main weakness. However, there is little foreign debt, thanks to exchange controls. The banks remain well run and well capitalised. And growth is relatively insulated due to a lower export dependence than parts of East Asia and Eastern Europe.”

Hart points out the analysis in the Economist article is poor.

He also notes that the epicentre of risk is in the developed, not the developed world.

“People are still harping back to emerging market crises, while the US and UK are ‘going Japanese’ with interest rates nearing zero,” he notes.

One commentator on the Economist website wonders aloud what a comparable table for the G20 or the G8 would show.

Looking at from a purely journalistic point of view, the Economist might have been able to defend itself better had acted a bit more like a newspaper and a little less like an economic journal.

Newspaper best-practice would be to contact some of the local economists of the countries that topped the table, or a range of economists that might know something about the countries concerned.

Or it would have been run as an opinion piece, with the author clearly identified.

The article has been cited as one of the factors that caused the rand to crash to R10,60 at the beginning of March. It has since clawed its way back to under R10.

If someone wanted to short the rand, they couldn’t have done a better job. The risk in running stories like this is that by forecasting crisis, a crisis is created.

In any case, quoting some contrary opinions would have made for a livelier, more dynamic article.