Economic Thoughts: Things warranting concern

The things to fear most at present? There is so much to choose from. Even when excluding the personal and focusing only on the economy, there still remains a rich list.


There is Blade holding forth on wealth taxes for the rich to pay for his students. There is the universal fear among financial officers (private but especially public sector) of a credit rating downgrade to junk. There is apparently deep dread at the SARB as to what will happen to us once the Fed countdown ends and it commences with its interest rate liftoff, finally leaving zero behind after having been stuck there for seven long years. There is deep anxiety running through the farming community, about 50/50 land redistribution, but even more immediate about a devastating, El Niño driven interior drought.


It is difficult to decide which one of these is more dreadful in its potential impact, because these are all major hits, if they were to occur.


Never mind simultaneously.


At least one can say to Blade to go and redo his numbers and not to be so eager & ideological in wanting to change society at enormous cost. Instead, promote greater efficiency in state spending, and there will be billions to spare in an annual budget running at over R1.3 trill to finance higher education in a more supportive way, in the manner it used to be when government subsidies for the universities were much higher and before it was decided to let the middle class pay more for its own education charges (with perhaps too many unintended consequences when many deeply poor youngsters were actively encouraged to seek such education, too, and started to overwhelm attendance?).


Also it would help if government were to do more to restore confidence in the economy, so that citizens may be more willing to be more enterprising, taking risks they won’t take if too anxious. This would be a feasible way of getting back to higher growth, and more resource generation, making it easier to address all our many ills.


Junk status will cost us. It was interesting last week to hear TPT (Transnet Port Terminals) CEO Socikwa at his results presentation clearly hinting that financial stability is critical, now that SA remains only one notch above junk status. We don’t want to go there, having to live as junk, with less access to more costly credit, something with our huge infrastructure backlogs we can ill afford.

SARB offers statistical evidence why we have reason to be concerned about Fed liftoff. It prominently showcases researchers who have found that a simple ratio of forex reserves to the gross external financing requirement (GEFR) largely explains the volatility in Rand depreciation over the taper tantrum period in 2013.


When updating the ratio for a set of emerging markets, comparing current to previous exposure, South Africa’s relative position barely changed between mid-2013 and earlier this year. In contrast, India rapidly increased its ratio of forex-reserves-to-GEFR through improvements in each component of the indicator, and forcefully reduced inflation. One then finds a reduction in reactions of the Indian rupee to Fed meetings. SARB concludes that reducing vulnerability to imminent Fed liftoff requires, above all, reducing the GEFR and/or increasing the forex reserves.


SA has clearly not done that, indeed its position has further weakened this year (though the SAB-Miller deal may shortly bring some light relief…). Ergo, we are as exposed (or worse) than during the 2013 taper tantrum. Fasten those Rand seat belts, for once the Fed attempts liftoff, market volatility will worsen, and SA (the Rand) unchangingly vulnerable.


I wonder whether Blade knows about that, and cares as much about it?


The real killer for me, though, is drought. If the prevalent weather conditions were to last through the summer into autumn 2016, as hinted at by the SA weather service last week, the impact on food prices could be major. That could unsettle many millions of poor South Africans, potentially much more than what happened to a few thousand students in recent weeks. With populists parties quick to capitalize (I know, politically incorrect term) on such opportunities.


Indeed, we hope for rain and a still reasonable harvest season, even if the El Niño omens aren’t good. But then we are already hoping for so much: a benign Fed liftoff, rating agencies patiently holding off a little longer, Blade acquiring a new state religion. Far too much to leave to chance. Don’t just stand there….