Our economy is bad, but not basket-case bad
The doomsayers who predict Pretoria will have to seek help from the IMF are a tad over-pessimistic
TALK that South Africa may have to go cap in hand to the IMF for a loan to tide it through a looming financial crisis is completely misplaced, despite the turmoil which erupted in local markets in December after President Jacob Zuma’s unexpected dismissal of finance minister Nhlanhla Nene.
The consternation prompted by the decision, and the brief appointment of the inexperienced David van Rooyen, prompted large capital outflows which knocked the rand 10% weaker to a record low against the dollar, and raised the cost of government borrowing.
But the currency has clawed back lost ground, the panic has subsided and investors have been soothed by the replacement of Van Rooyen with Pravin Gordhan. Analysts say there are many reasons to believe that IMF intervention will not be required.
For one thing, the country’s $46-billion (about R745-billion) of gold and foreign exchange reserves — though small by global standards — are still enough to pay for five months of essential imports, while the ratio of government debt to the total in South Africa’s deep and liquid capital market is so low that interest costs remain manageable.
Concern that South Africa’s sovereign credit ratings may be downgraded to sub-investment grade, or “junk” status, are also overdone as this would not force rand-denominated debt out of the JP Morgan Emerging Market Bond Index, the most widely used benchmark for investing in developing markets.
Foreigners own around a third of the country’s local government bonds, which are rated significantly higher than foreign currency bond issuance. South African bonds would also remain in Citigroup’s Government Bond Index — which South Africa only joined in 2012 — for the same reason.
“Thinking that South Africa would have to go to an IMF programme is way off the mark,” said Razia Khan, Standard Chartered’s research head for Africa. “It has a proven ability to deal with volatility and it doesn’t have that degree of vulnerability. These are difficult and painful times, but not a crisis.”
Speculation that an IMF handout would be required surfaced last year after the publication of RW Johnson’s book How Long Will South Africa Survive?, which predicted that this would happen within two years because of the worsening economy and poor political leadership.
Johnson’s remarks were taken to heart by some, because he correctly predicted in a book of the same title in 1977 that apartheid would collapse during the mid-’90s.
The escalation of foreign selling of domestic shares and bonds — which has averaged a net R16-billion in each of the past three months — together with a 250 basis point rise in yields on the benchmark 10-year government bond last year, fuelled concern that South Africa was indeed headed for a balance of payments crisis.
But according to Colin Coleman, MD of Goldman Sachs for sub-Saharan Africa, none of these negative developments — including the impact of drought on economic growth and inflation — materially affect the conclusion of “stress tests” carried out by the investment bank last year.
“The bottom line is that due to very low levels of offshore hard currency government debt, it doesn’t move the needle materially on the rate at which the South African Reserve Bank’s reserves get depleted,” he said.
But he cautioned that if the large bond and equity outflows seen so far this year persisted, they could signal the start of a “sudden stop” scenario in portfolio flows, which over time could force the country to seek external assistance.
Even so, the investment bank’s research showed that South Africa would have two years to undertake the reforms required to reverse the trend before reaching that point.
Gordhan’s budget on February 24 will be closely watched for assurances that spending and borrowing will remain in check, and for measures to spur the flagging economy.
If his budget inspires confidence, analysts believe that Standard & Poor’s will not downgrade South Africa’s sovereign credit rating to “junk” when it carries out its next scheduled review in June.
The elephant in the room is the increasing possibility that South Africa will slip into a recession this year, as rating agencies have emphasised lack of growth as a key concern. The worst drought in decades will take a heavy toll on both farm production and inflation.
Barclays Africa economist Peter Worthington thinks that the impact of the drought could shave 0.4% off economic growth this year, which he estimates will come in at 0.9%. Stanlib economist Kevin Lings thinks growth will stutter to just 0.5% this year.