Building Confidence is key to rebuilding SA post COVID-19
Minister Tito Mboweni’s supplementary budget has done too little to inspire confidence, according to Old Mutual Investment Group Chief Economist Johann Els and Portfolio Manager Graham Tucker, who say that bold and decisive policy leadership is needed if South Africa is to dig itself out of a debt trap.
05 August 2020: Reflecting on the Minister of Finance Tito Mboweni’s supplementary budget, listeners will have been struck by the extent of the damage done by the COVID-19 pandemic and the apparent absence of a clear plan.
In the face of growing debt obligations and deteriorating public finances, the minister was able to deliver a promising message. However, this masks the huge implementation risk that hangs over promised policy reform and expenditure cuts.
The promise of more details in the October medium-term budget framework has done little to settle nerves or appease credit rating agencies that are concerned about South Africa’s growing debt pile. Rightly so, as the economy and its management are in a far less secure position compared to the 2008/9 Global Financial Crisis (GFC). At that time, South Africa was able to weather the storm better than many developed economies, helped along by the commodity’s boom that followed shortly after.
So, what lessons from the GFC can we apply to the current COVID-19 crisis? The first is to acknowledge that the nature of these crises is very different: the former was purely economic, whereas the COVID-19 pandemic is a health crisis that has morphed into an economic one. It follows then that the global economy should recover once the pandemic has passed. However, the effects of COVID-19 are clearly more severe than the GFC and come with more unknowns.
The second lesson is that we can expect inflation to remain low for some time still. The post-2008 fears of inflation rising because of central bank quantitative easing programmes have proved unfounded, and we should expect the same this time around.
Thirdly, the rand strengthened substantially in the short term after the 2008 crisis on the back of strong inflows of investor capital looking for more attractive returns. This we can expect sto happen again.
While repeat performances are expected in these three areas, this will happen despite our currently weaker economic and fiscal positions.
It is in this context that the detail-light supplementary budget casts some doubt on the president’s talk about structural reforms. The year started on a good note when the finance minister promised fiscal consolidation, even going so far as promising cuts to the public sector wage bill. This was always going to be a tough act to pull off, and the faltering progress since February has borne out of this lack of confidence.
At the end of the day, confidence is what matters most. Not only to the public and business leaders but investors, lenders and rating agencies.
We contend that President Ramaphosa has to accelerate promised reforms and do so with greater transparency and expediency.
Promises of addressing unproductive and unprofitable state-owned enterprises (SOEs) and removing hurdles to economic growth have to be translated into action.
We would go further and say that transformation of SOEs should include privatisation, the labour market needs to be deregulated, and that government should make a strong commitment to implement its very own National Development Plan immediately.
Lastly, we need to overcome our differences to create a true social compact between government, labour and business. The lacklustre performance of the local equity markets in the past five years is a proxy for the failure of these three parties to find common ground. What confidence, then, could investors have in the local equity market when returns from cash have outperformed the JSE by a record market.
This destroys faith in the equity markets, which is incredibly hard to regain. Worse, this means that investment capital that should be used to grow local industries through equity markets is now diverted elsewhere. It’s not surprising then that so many large corporates have expanded their operations internationally because they see no growth locally.
Not all of these international expansions have been successful, loading even more pressure on companies that are struggling to eke out growth at home.
The simple reality is that for companies to grow, the economy needs to grow. More importantly, it needs to grow a fair clip faster than the projected 2%-2.5% over the next five years.
President Ramaphosa has spoken of doing “whatever it takes” to get the economy back on the right track. He needs to share specifics on what he has in mind when he says that.
If the president hopes to not lose everyone’s confidence, this ought to be done before yet another directionless four months pass by.
Image sourced: Consultancy