SA poised for return to health and better growth over medium term

Lots of scope for further reforms and an impressive amount of low-hanging fruit is ripe for the picking

In 2017 we had a Goldilocks global economy. Inflation started picking up in the advanced economies, and in emerging markets it was in line with targets. Growth was stronger and most economies were accelerating — the world economy felt just right. At the end of the Goldilocks story a family of bears comes home. Our tale has taken the same direction. The synchronisation of global growth has broken down in 2018, with the US surging ahead while other countries slow down.

Stronger US growth and higher rates have appreciated the dollar. This combination of factors challenges emerging markets. It has interrupted capital flow and prompted currency depreciation. Countries with substantial foreign currency debt have seen balance sheets deteriorate. Inflation pressures have generally intensified.

Unlike Goldilocks, however, most emerging markets weren’t caught napping when the bears returned. Policy frameworks can handle such challenges. In particular, most emerging markets rely on flexible exchange rates to absorb shocks. Additionally, substantial stocks of foreign exchange reserves provide resilience to these shocks.

Many emerging markets have strong central banks and inflation-targeting frameworks that help keep expectations of inflation anchored. Most countries are vastly better positioned than they were during the 1997/98 crisis.

The more difficult question is: how will countries adjust to ever-changing global circumstances? Let me set out some challenges and difficulties. First, many economies with larger fiscal and current account deficits have experienced more currency depreciation in 2018. Reducing this vulnerability will require shrinking those deficits while keeping up growth. Macro policy should try hard to achieve that, with more investment central to success.

Second, while the 2000s exhibited unprecedented growth, outside Asia subdued growth is prevalent and some countries are talking about a lost decade.

Finally, in advanced economies and emerging markets alike, dissatisfaction with economic outcomes has generated political developments that can create a vicious circle of bad economic decisions and further political disaffection. How can we address these challenges?

Since the 2013 “taper tantrum”, SA has undergone a substantial macroeconomic adjustment. The current account narrowed from nearly 6% of GDP in 2013 to 2.4% in 2017, largely as the trade account moved to small surpluses. Our services account has followed a similar trend. The income and current transfers account has remained in deficit, however, at about 3% of GDP.

Income payments are high, as foreign liabilities (mostly sovereign debt) yield more than our foreign assets in rand terms. In short, the fiscal balance has changed less than the current account deficit. The change in the primary fiscal balance has been positive, narrowing from 2.3% of GDP in 2013 to 1% in the latest financial year. The debt will stabilise when this becomes a positive balance.

Let me reiterate three crucial points made by finance minister Tito Mboweni in his recent address to parliament: We must choose a path that stabilises and reduces the national debt. We cannot continue to borrow at this rate. We must reduce the structural deficit, especially the consistently high growth in the real public sector wage bill. New fiscal anchors may be required to ensure sustainability, in addition to the expenditure ceiling. We must choose-public sector investment over consumption.

With rising long-term interest rates, credit ratings downgrade risks and tax increases, the case for fiscal stimulus based purely on spending aggregates is well past its sell-by date. SA is a low-saving economy. We can improve savings rates, especially through fiscal policy, but we are not going to be a high-saving economy for the foreseeable future.

We need to get to where we can sustainably fund investment demand in excess of local savings. Getting there is likely to require larger capital inflows into equities and direct investment, and less into government bonds. Critically, these kinds of inflows help growth.

SA still has significant twin deficits. They are smaller than in 2013, but still relatively large. We need to reduce our fiscal deficits, and we need to ensure our borrowing is more productive. We want to attract investment because it provides an institutional environment that gives investors security and predictability.

SA’s economy is likely to grow by just 0.7% in 2018, significantly lower than earlier expectations. Global factors play a role, but domestic growth has remained subdued despite a cyclical upturn in the global economy. Some blame attaches to shocks like drought or strikes, but these cannot explain why growth has stayed low for several years. One of the primary causes of weak growth has been the severe decline in SA’s governance. One of its many consequences was a large decline in business and consumer confidence.

There are several reasons to expect better growth over the medium term. One is our low investment levels. It would make sense for firms to begin investing more, in the first instance simply to catch up with depreciation.

A second pro-growth factor is better household balance sheets. Households have achieved significant deleveraging since the housing boom of the previous decade. Debt-toincome ratios are now back to 2006 levels and close to longer-term averages.

A third factor favouring growth is the scope for further reforms. Energy and initiative from the government around raising employment and investment is positive. As an economy, we are still a long way from the efficiency frontier in a range of areas, perhaps mostly in our network sectors. This leaves an impressive amount of low-hanging fruit available.

Forecasting economic events is hard, in particular when politics plays a large role in them. When a country’s growth stalls, one plausible outcome is that bad economic performance will produce a populist rejection of incumbent elites and policies. But it is increasingly clear that our institutions are robust in resisting unhelpful economic ideas.

This is a difficult moment for emerging markets. After a long run of success we are now confronting a range of serious challenges, including excessive macroeconomic imbalances, stalled growth and difficult politics.

The past few years have been difficult but things will get substantially better. We are recovering from a period of self-inflicted injuries, and there are good growth opportunities that we can exploit when we have recovered our health. I am confident that SA tomorrow will be better than SA today.

● Kganyago is SA Reserve Bank governor. This is an edited version of the speech he delivered at the SA Tomorrow conference in New York. The full speech is available on the Bank’s website.