What Ramaphosa must do to make SA great and close inequality gap
SA’s GDP in the second quarter of 2018 — announced on September 3 — was disappointingly smaller than the quarter before. The news sent the rand weaker and the cost of servicing SA debt higher.
Some of the weakness in the dollar-rand exchange rate and weakness in the rand compared to its emerging-market peers has been reversed in recent days. As has the upward pressure on SA and emergingmarket risk spreads.
The market logic that sent the rand weaker and spreads higher on the GDP news seems clear enough.
Slower growth drives capital away from the economy helped by the rating agencies that are expected to officially downgrade SA’s credit ratings.
The weaker rand adds to inflation and is thought likely to lead the Reserve Bank to raise short-term interest rates. Adding higher interest rates to higher prices is a recipe for still slower growth.
What can be done to reverse the vicious cycle in which SA finds itself — the slow growth that drives capital away, weakens the rand and adds to inflation? It also seemingly leads inevitably to still slower growth in spending and output. By the same logic, faster growth would do the opposite — attract capital, strengthen the rand and the Treasury and lower inflation.
SA clearly has a supply-side problem. We are not producing. The reasons for this failure may seem complex but they are the result of policies that focus primarily on who benefits from the goods produced.
The revised mining charter, to be made public soon, provides a timely opportunity to demonstrate a new pragmatic economic approach, one intended to attract rather than repel capital on internationally competitive terms.
But SA not only has the problem of too little supply, it also suffers from too little demand — and that was exacerbated in the secondquarter GDP estimates by a large decline in the demand to hold inventories.
Without the reduction in inventories of R14bn in constant prices, growth in GDP in the second quarter would have been 2.9% higher. But leaving aside declining investment in inventories or volatile quarterly changes in agricultural output — that could easily reverse themselves — the growth in final demand by households, companies and the government is running well below even the limited potential supplies of goods and services, and has been for many years.
Interest rates have a predictable effect on the willingness of households to spend (out of after-mortgage payment income) and the willingness of companies to spend to satisfy those demands.
The link between interest rates, the exchange rate and inflation is highly unpredictable given that the forces that drive the exchange rate are global rather than local events. Thus, raising interest rates in response to rand weakness exaggerates the business cycle rather than smoothes it.
The Reserve Bank should have reduced interest rates much faster and sooner than it has to help match weak levels of demand with potential supply, even when growing slowly. The best it can do now for the economy is to surprise the market by not raising rates.
Over the course of the next few years, if demand remains as weak as it has been, the Bank could reduce them without being regarded as being soft on inflation. This would help take SA closer to a virtuous circle of faster growth and less inflation, and give the economy some head room to undertake the supply-side reforms that are essential if its growth potential is to be raised permanently.
Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.