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By Arthur Kamp, 2 October 2013
There are two issues. First, the current impasse relates to the inability of the US Congress to pass the necessary legislation to continue funding the government in the new fiscal year, which commenced on October 1. At the heart of the matter is the Affordable Care Act (so-called Obamacare), which Republicans wish to see delayed for a year.
Second, the debt ceiling (which places a legal limit on the amount of debt the US Treasury may issue) needs to be raised. The US Treasury has indicated it will run out of capacity to borrow by October 17. Apparently, the Treasury has sufficient cash at hand to continue paying the bills until close to the end of October 2013. If the government cannot issue debt it cannot run a budget deficit. Spending is restricted to available taxes and other revenue sources.
The partial government shutdown affects about 800 000 government employees (who are currently not being paid) and some government functions (including statistical releases!), but not critical government functions including public safety. At least private sector releases (including the ISM manufacturing index) are not affected and, ostensibly, data deemed critical by the Fed will probably also still be released. In a useful summary of the issues, Alec Phillips from Goldman Sachs notes only “discretionary” spending will be impacted. This amounts to approximately a third of total federal spending. A little more than 50% of this is considered critical and is not affected.
The shutdown is not without precedent. Goldman Sachs reports the longest previous shutdown equivalent to the current situation lasted five days. Shutdowns in the 1980s and 1990s lasted a couple of days.
It is generally expected that a shutdown of one week would shave around 0.25% off annualised real GDP growth in the fourth quarter – not much, but also not helpful in an economy where growth is modest. And, although federal government spending is adversely affected, a portion of this is likely to be implemented post the shutdown (including, possibly, back-dated pay for government employees). Of course, everybody will probably feel bad! This will be reflected in consumer and business confidence indicators.
But, the real issue is the debt ceiling wrangle, which if left unresolved for too long could affect the US sovereign debt rating. And, if we were to think the unthinkable: that agreement on the debt ceiling could not be reached? The fall-out in this scenario would result in rising global risk aversion, which would probably expose SA’s economic frailty, putting downward pressure on the rand and upward pressure on inflation. Domestic demand, including investment, would be adversely affected and unemployment would increase.
But, given available information, it is unlikely that one political party in the US will want to shoulder the blame for shutting down the government (or, ultimately, failing to raise the debt ceiling, which increases the risk of missing debt related payments) and thus compromise is likely to be reached. So while we cannot predict the outcome with any measure of certainty, it is not worth panicking and investors should, instead, keep their eyes open for possible opportunities that often arise during uncertain times like these.
For more information contact Arthur Kamp on +27 21 950 2500 or firstname.lastname@example.org