Africa Brief 12 February 2017
by Cees Bruggemans words 600
With the radical economic transformation agenda becoming ever more explicit politically, how is this being absorbed by the SA economy? It used to be that “shocks” (unexpected events, with forward data implications) caused deep market disturbances (sell-offs…). Shocks could put the economy into recession if there were sharp inventory corrections, and shocks could trigger booms if affecting sentiment positively (sharp commodity price rises).
How do recent events rate in this respect, and how is the economy affected?
The policy favouring radical economic transformation isn't of recent origin. It has been around the better part of a decade, though for long implicit rather than explicit. However, the intensity of these intentions, and accompanying demands, has been increasing, to the point of late offering seemingly genuine shock value.
Financially, markets can reflect such intrusions soonest, while the economy may take time reflecting any impact. In both instances, the impact can vary from little shock to total shock. There is also the reality of steadily absorbing these realities over time.
Surprise has been expressed about the Rand hardly moving late last week as pandemonium erupted in Parliament, followed by the most blatant vision of radical economic transformation so far offered.
Besides being a spectacle, the evening’s entertainment did not seem to divulge anything that would move markets. The Rand hardly budged.
This doesn't necessarily mean there are no consequences. The Rand’s long-term undervaluation can be partially traced to poor economic vision and micro policy.
Also, if last week is simply one more nail in our national coffin, in the manner that our institutions are thrashed and become unworkable, it presumably will become reflected in a belated credit derating. That would move markets.
Even so, our macro institutions are keeping their heads above water, and rating agencies may still believe there could be political reform down the road with the fading of the Zuma era. And thus most data sets seemingly are on hold, waiting.
Regarding the economy, some parts are said to be in recession (mining for instance), but large parts of the remainder seem to keep drifting along, even without effective political leadership. No growth, but also no precipitous decline.
To put it yet differently, the public sector economy has had its efficiency undermined over many years, but may have started to stabilise. The private sector economy has experienced a loss of confidence over many years and has adapted to this evolving condition, mainly by cutting back fixed investment, inventory and labour forces, effectively putting large parts of its productive means on a good maintenance basis. And otherwise migrating their critical mass elsewhere.
None of this is encouraging. The economy isn't brain death, but seems to be on autopilot, going through the motions of keeping things ticking over instead of fully utilizing our resource potential.
The biggest shock potential ahead is the election of the next generation of political leadership. That will provide tipping points, either way. The good news is that this should be resolved before yearend, barely ten months away. The bad news is that the outcome could still be disastrous.
With a general loss of survey credibility in recent times, there may be a similar unwillingness to accept the inevitableness of things later this year. Whatever it is that markets and economy are imbibing, they are prepared to remain adrift for now, awaiting actual events.
This shifts the real news focus internationally, and how it may affect us, even if our own daily news flow appears to be documenting our steady institutional demise. Yet markets and economy aren't apparently fully ready to acknowledge this.
Bruggemans & Associates Consulting Economists