Closer to the cliff as SA lives beyond its means
AS a nation, South Africa has been living beyond its means for an extended period. Our years of excess are most strikingly reflected in the current account and fiscal deficits, neither of which appears to be narrowing meaningfully.
Indeed, October’s trade deficit was recorded at R21.4-billion as retailers stocked up on electronics and appliances ahead of the holiday shopping season. Conversely, exports were down 2.6% year on year as dwindling demand from a slowing Chinese economy depressed commodity prices and export earnings.
October’s trade deficit neatly encapsulates our socioeconomic predicament. To narrow any deficit, income must increase and expenditure must be slow or both. In the context of the current account balance, earning more means growing production and exports.
This, however, requires three basic elements: demand, labour and electricity. Should any one of these be missing, no amount of exchange rate weakness will boost exports.
Instead of acting as a shock absorber that slows imports and provides a boost to exports, rand weakness is placing upward pressure on inflation, inviting the Reserve Bank to hike interest rates at a time when growth is weak and inflation not demand-led. In short, the burden of economic rebalancing is falling squarely on the shoulders of the South African consumer.
The story is similar for the fiscal account. Its borrowing capacity already stretched, the National Treasury needs to rein in expenditure (public sector wages and head count) or earn more (taxes). Strong domestic labour movements are making expenditure cuts difficult, while pedestrian economic growth is jeopardising tax-revenue targets.
If this situation doesn’t change, raising taxes will be the only alternative. Again, the consumer will be left with the adjustment burden.
It’s not like we haven’t had sufficient time or fair warning to get our economic and fiscal affairs in order. The US Fed’s muchanticipated interest rate increase has been well communicated, and ratings agencies first started signalling their concerns around our economy in 2012. We are slowly running out of time, and the reforms we are struggling to voluntarily implement may soon be forced upon us by global factors.
This month, ratings agencies delivered their updated assessments of our sovereign credit rating. While we maintained our investment grade standing, the risks of losing it will rise if the status quo of sub-par growth persists. On this score, next year’s budget speech will be key.
Fed lift-off, however, poses more immediate risks. The rand has gradually weakened against all the major crosses in the run-up to the Fed’s move, but a US interest rate hike still doesn’t seem fully priced in, and holds the potential for another rand tantrum. The resultant inflation and interest rate response it would elicit bode ill for already floundering household consumption.
Despite November’s new vehicle sales registering modest year-onyear growth of 0.4%, annualised figures remain in the doldrums as not even significant incentives prove alluring enough for weary consumers. Similarly, retail trade sales continue to eke out meagre gains with the durable goods component in contraction. Perhaps most worrying is that 2016 is likely to be even tougher.
Rising electricity, water and food prices, and the potential for further interest rate and tax increases, are set to further erode disposable income. Unemployment remains stubbornly high, and falling business confidence and investment levels suggest this won’t change soon. New year job losses loom in the mining and manufacturing sectors as commodity prices continue downhill.
Brazil and Russia are in similar boats, but that is little consolation for South Africa. Whether we avoided a recession or not is academic. What is inevitable in our scenario is that consumption growth must slow further in 2016. If, however, we could reach a social compact whereby labour and the public and private sectors all agreed on concessions that would allow us to trade our way out of our predicament, consumption would have to slow by less and for a shorter time.
Nxedlana is FNB chief economist Comment on this: write to tellus@sundaytimes.co.za or SMS us at 33971 www.sundaytimes.co.za