More kicks to a fallen economy

Just before the Mining Charter was released on the eve of the June 16 weekend, the rand was hitting new highs, despite the recent downgrades to SA’s credit rating. The downgrades could not have come in a better global environment — that was the theory. “Risk-on” international investors have been pouring money into higher-yielding emerging market debt, including markets with pretty dodgy politics and questionable institutions. SA continued to look reasonably robust, despite the downgrades and the political noise, and the cash was coming into debt instruments, even if international investors weren’t willing to commit much to equities or to longer-term direct investments in new projects.

But there is only so much a currency can take, even in a favourable global environment. SA’s local, “idiosyncratic” events of the past couple of weeks have done nothing for the currency, which has now gone weaker than R13 to the dollar again; before the charter it was heading for R12.

If the charter did a good deal of damage, the public protector’s report on the Absa/Bankorp lifeboat has done more again, because of its reckless disregard for the Reserve Bank’s independence and core mandate.

In the midst of all the policy drama, Tuesday’s release of the Reserve Bank Quarterly Bulletin provided a sobering dose of reality. Many of the numbers were already known because Statistics SA, which now calculates both the production side GDP and the expenditure side GDP (which the Reserve Bank used to calculate) had already reported that SA was officially in recession as of the first quarter.

However, the quarterly bulletin added plenty of detail to the bare bones of Stats SA’s figures. It also published first-quarter balance of payments figures, which showed a deficit on the current account that, at 2.1%, was worse than the 1.7% in the fourth quarter of 2016 and slightly worse than most in the market had expected. That could have driven the rand even weaker but, given the stream of political bad news, it is hard to tell. A few years ago, SA’s high current account deficit was one of the factors that made its currency one of the “fragile five” among emerging markets. Now, the deficit is down to much less risky levels, which means SA needs that much less in the way of foreign capital inflows to finance it.

That seems like good news, but in practice, the lower deficit is as much a product of the weakness of the economy as anything else. Imports have come down because investors are not investing and consumers are not spending. Investment spending was mildly positive in the first quarter after a negative 2016, but it is not growing fast enough to cover depreciation and to replenish SA’s productive assets. The effect is that SA’s potential growth rate — the rate of growth the economy can sustain without overheating — has come down to as low as 1%, some economists estimate.

Nor is there any real cheer from exports, even though the prices of SA’s exports have been improving. It was only because of those better prices that the trade part of the current account was in surplus — which helped to offset a decline in foreign dividend inflows and keep the current account deficit from weakening even more. But in volume terms, SA exported less. That meant net exports (exports minus imports) were a big negative for the first-quarter GDP, which was hit too by a sizeable decline in household spending as well as a fall in government spending.

All the recent surveys and indices are pointing to ultra weak investor confidence as well as weak consumer confidence and it is quite possible that the second quarter could be another negative. This is not an economy that is anything like robust enough to take the kind of hammering SA’s political leadership is inflicting on it.

THE LOWER DEFICIT IS AS MUCH A PRODUCT OF THE WEAKNESS OF THE ECONOMY AS ANYTHING ELSE