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Africa Brief                                                                             10 April 2017

Autumn harvest     

by Cees Bruggemans                    words 750

Our Autumn is barely three weeks old, and we already have had to endure raging storms buffeting our financial markets & economy. It isn't easy so far to assess the storm damage, short- or long term. But this doesn't keep some people from banding numbers around as if these are given outcomes, only to materialise.

The Rand could weaken (a lot), our interest rates could resume rising (according to some by 3%), the country risk rating could yet be more thoroughly thrashed deeper into junk (downside liberally mentioned), household and business uncertainty could deepen yet more, their withholding of spending eroding the growth rate anew, to the point of even sinking us ingloriously into recession.


That's a mouthful, a bad hair day if ever encountered by the SA economy in apartheid days, and entirely self-inflicted, as it was also then, just by different people pursuing different agendas.

But then we also encounter views that the Rand will not weaken much for most of this year, presumably supported by global events shielding emerging markets like at present. The Rand could weaken a lot on a longer view if plundering of the state and private incomes and wealth were to go up a few notches, as risk deepens and capital flight becomes even greater, and the global emerging market support fades anew.

SARB is keeping to the sidelines for now, its opinion vaguely neutral, possibly a reflection of not really knowing how much damage our politics will do to our economy, a dilemma they share with Yellen at the Fed, even if slightly differently constituted. If you don't know what's going to happen to Rand and inflation, keep a straight face and your powder dry. If down the road we were to get blasted out of the water by multiple rate increases, the reason will be clear. But as yet it isn't an established fact how these many cookies will crumble.

The foreign rating agencies must be feeling dripping egg on their faces, at least some should. Even if our credit rating deteriorated in recent years, there was generally an attempt to keep a brave face in our support, giving us ever more rope (or so it seemed). The promises from our side were many, about fiscal policy, SOE governance, and labour practices, our track record wasn't half bad among (far) worse emerging market fellow brethren, and our politics might be in need of cutting it some slack to deliver the imponderable.

In the end, our politicians did not prove trustworthy (why surprised?), and the extra rope fed to us more than adequate to hang us in style. S&P was most abrupt in cutting its losses and junking us, and Fitch wasn't far behind in also doing so.

It isn't, of course, as if we haven't been junk before. In the 1980s only the Swiss in the end stood by us, if for a very stiff (junk) premium, thank you. We were forced into debt default when the Americans called their lines, and the other multinationals could hardly not follow that example.

Today, unless there is an abrupt political reason, they don't call your lines, but they force up your risk status and interest rate premiums. Beyond certain risk levels fewer foreign financial investment houses are allowed to invest in your paper, narrowing your market yet more, and creating finance-raising problems.

The focus then increasingly shifts, as it did in SA in the decade after 1985, to force a massive change in the national cash flow – less growth in fixed investment, consumption and import spending, greater external surpluses to pay down the outstanding debt (terms of which were negotiated and called a debt standstil. No foreigner was going to write off our debt as a gift – that was NEVER the deal).

As to how growth will perform amongst all that, it remains a challenging question, difficult to call, as the SA private economy has more resilience than always allowed. Coming months will show how sentiment has been affected, expectations changed, and to what extent such sand in the gears has slowed the economy anew.

The real threat is longer term, if the plundering turns into regular harvesting and more people decide to leave. That is the real challenge facing our population multitude of millions, though I dare say a few thousand families can look forward to greatly enriching themselves.

The real answers here are political, and only secondly the economic decisions flowing from them (and even then one has to be cautious not to be naïve).


Cees Bruggemans                                                                          

Bruggemans & Associates  Consulting Economists



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