Cyril goes for growth, not votes
“Silly and populist notions” will not rescue or transform the economy, President Cyril Ramaphosa tells the Sunday Times today.
In an interview with business editor Ron Derby after announcing a stimulus package on Friday, Ramaphosa denied that his intervention was aimed at securing ANC votes next year.
“This is aimed at cranking the economy into life,” he said.
Ramaphosa has instructed finance minister Nhlanhla Nene to find R50bn by reprioritising government spending, and has centralised R400bn of infrastructure spending in the presidency. He believes the private sector will come to the party.
“We should be at the top of our game when it comes to being an enabler and being a catalyst,” he said.
Enthralled by our political theatre, we sleepwalked our way into a recession. As enchanting as the plays for ascendancy within the ruling ANC and the competition among its rivals to gain from the governing party’s falling popularity were, they also served as an antidepressant to tales of corruption spewed out daily. The corruption of Jacob Zuma and his band of merry men and women while in the Union Buildings still has a hypnotic effect on the country. How many braais will you go to today where the topic won’t feature and end with a shrug of the shoulders? That shrug represents the loss of confidence that has stuck to the South African story for at least as long as the former president’s second term.
It’s a stench that’s going to take a long time to overcome.
Try as they might to convince us that the Zuma years are no more, President Cyril Ramaphosa and team now understand the difficulty of firing up the economy. The game of musical chairs in party corridors, while important, was all just one step towards getting the country back on a positive growth trajectory. Here’s the thing about a shrinking, or at best a flat-lining, economy that we need to appreciate for any incoming administration: it eats away at some rather important tools needed for a state, any state, to revitalise an economy.
Stuck in a recession, textbook economics says expansionary fiscal policy is in order. What this entails is increased spending by the government because this creates demand for goods and services. Another part of the tool kit is lowering taxes to increase disposable income. At this juncture, the South African state simply doesn’t have those tools in its box. The VAT increase this year says it all.
The last time it was in a strong fiscal position was more than a decade ago, when the state had a budget surplus and was preparing for a World Cup to keep a buzz in the economy. The budget is now in a deficit, which means the state is spending more than it is generating as tax revenues continue to fall. Debt-to-GDP levels are above 50%, which for any emerging-market economy is not healthy. While the likes of Japan have debt-to-GDP ratios above 250%, the difference is that being one the world’s larger economies means you are less reliant on international markets to fund liabilities.
Under these conditions and set against a climate of
SA’s second recession in less than a decade, Ramaphosa has had to find something to stimulate the economy. There was no sense in not doing anything, especially with a private sector still enthralled with the political theatre and not spending. The stimulus plan delivered on Friday was the best any administration could do, working within these limitations. Working within the budget was the only place to find a stimulus injection for the economy. To borrow would have been irresponsible as it would lead to higher lending costs, which are already at alarmingly high levels. One would hope investors would take some confidence from the plan delivered this week, as it was prudent and not drawn up by populists.
There’s one other place that some critics of a conservative approach to fiscal management would point to as an avenue to boost the prospects of the economy. That is to tinker with monetary policy and pressure the Reserve Bank to put its inflationtargeting mandate on the shelf, and concentrate on growth and jobs. A huge chunk of the South African economy, over 60%, is consumption, hence we have some of the world’s biggest retailers, even though we are but 0.56% of the global economy. By lowering borrowing costs, the argument is that consumers will borrow more and spend more and in turn grease the wheels of this creaking economy. The price of cutting rates with a much weaker currency will be offset by the fact that there’s money floating about and an economy motoring on. This will continue to be the only way the US will think its way out of a recession.
SA is not the US; we aren’t custodians of the world’s reserve currency. When the rand plunges, it immediately feeds an inflationary dragon, a dragon who feeds off the poorest of the poor first because the rand buys less. And without inflation targeting as a cornerstone of monetary policy, that value will keep slipping, and ever faster.
Once a central bank loses its most important attribute, credibility, and that comes with its independence in following its core mandate, a currency is left to the wolves of Wall Street.
At that point, what would be the buying power of the state? Would it ever be able to play its part in stimulating the economy without having to resort to big-money loans from the IMF or the Chinese state? That is where sovereignty is lost.
Ramaphosa has had to find something to stimulate the economy