Posted on February 27th, 2009 in JMCA News
Financial Crisis – Can South Africa Navigate the Murky Waters?
The global economy is in the midst of the worst economic crisis since the Great Depression, and it’s not discriminating in its choice of victim, with both developed and emerging markets suffering. There has been nowhere to hide to escape the chaos. Most stock markets are plummeting and many currencies are devaluing. Economic growth has ground to a halt and in some cases has been replaced by negative growth or recession. The world is full of uncertainty and turmoil, and we are all likely to feel the repercussions of this crisis for many years to come. The question pertinent for South Africa is: to what degree will this global financial crisis affect us, and will South Africa manage to fare better than other countries?
Government Spending – Who’s Paying?
As an emerging market, South Africa will not be able to buy itself out of economic troubles as the US is trying to with its bail-out plans. Instead, Government’s plan is to introduce large fiscal stimuli to help keep the effects of the financial crisis to a minimum. At the budget speech recently, we heard that the planned public infrastructure spend is R780bn over next five years, while the public will benefit from R13bn in tax relief. This leaves the government with a rather large fiscal deficit, 3.8% of GDP, which needs to be funded. There are several possible ways this can be financed:
- Getting the public to save more.
- Increasing foreign investment into South Africa.
- Through the use of debt instruments.
Increased Saving
Tax relief might have put more money in the consumer’s pocket, but South Africans are quick to take it out again. The retail market has shown little or no reduction in sales figures over the past Christmas period compared to the previous year. Additionally, in South Africa’s case, the fear of a possible recession is not wide spread and is clearly not an incentive to save.
Foreign Investments
One way of attracting foreign investors is by increasing interest rates – this results in higher returns on their investments. But increasing interest rates is likely to do more damage than good. Most of our local population has some form of debt, rather than savings. By increasing interest rates, more money would need to be spent on debt, leaving less money for the necessities and therefore reducing spending – not bad in itself but, on the other hand, this stops the flow of money within the economy and makes a recession more likely. In his Budget Speech, Trevor Manual encouraged banks to continue to lend to creditworthy people in an attempt to continue cash flow, while the Reserve Bank sent a clear signal that it is trying to stimulate economic growth by decreasing the interest rates by 100bps. It is then highly unlikely that interest rates will be increased to encourage foreign investment and local saving.
Issuing Bonds
The remaining option seems the most likely course, which is to fund the deficit through debt instruments such as Government bonds. Parastatals, such as Eskom, will also be likely to raise some of their funding through debt instruments. Key to the success of this course of action is investor confidence in South Africa, convincing them that the country will not default on the debt it issues. So what are the factors that will influence South Africa’s ability to negotiate this difficult period smoothly?
Obstacles
Starting with the negatives, South Africa is an emerging market and faces many of the same problems as other developing nations. Issues such as poverty, disease, crime, job creation, service delivery and infrastructure are all in the forefront of many people’s minds. These are all an additional burden on the government. During a time when developed nations simply need to survive, South Africa has much more on its plate.
Political instability, both locally and regionally, is another negative factor, with the national elections just around the corner. No one is certain what effects the split in the ruling ANC will have on the country; and with big questions hanging over the head of the ANC president and possible next South African president, Jacob Zuma, the political players are walking a precarious tightrope at the moment. The world and South Africa will be paying close attention to what unfolds in the near future.
South Africa’s economy relies heavily on the resource sector and, with the recent sharp fall in most commodities – with the exception of gold – this will put huge pressure on the mines, many of which operate on very small margins. With the mining sector being one of the largest employers in the country, many jobs stand to be lost should mines need to be closed. Exploration for many companies has already been halted and some mining operations hang in the balance. Should the resource prices continue to drop, this would be a serious blow to the economy of South Africa. Even without further drops in prices, earnings will be under immense pressure and we have already started to see a drop in tax revenues.
Silver Lining
South Africa’s financial sector is strong and well-regulated. Thanks in part to exchange controls, local banks had no access to toxic overseas assets and the Credit Act limited their ability to create their own. Our banking system looks reasonably healthy and robust in relation to other countries.
We also find ourselves in the position of having relatively high interest rates compared to the rest of the world. This gives South Africa more scope to decrease interest rates to stimulate growth. Countries with low starting rates have limited scope to achieve such an effect.
Additionally, while many countries are experiencing a decrease in foreign investment, South Africa is looking forward to the 2010 World Cup. A large scale international event of this kind is likely to draw significant international funds into the country, both during 2010 and thereafter, if the exposure we gain in the world arena proves to be a successful advertisement for our country. However, the world recession can be expected to be a limiting factor on the number of spectators expected to attend.
Other positive signs for the economy also include the fact that inflation recently peaked and is heading downwards. The expectation for economic growth is 1.2% in the coming year – positive growth in a time when many economies are in recession. The large fiscal stimulus should also go a long way towards keeping unemployment steady.
What will the Future Bring?
Can South Africa weather the global financial storm? The answer to that hinges on many eventualities. However, South Africa holds some strong cards in its hand and, if we play them right, we could fare better than most. There is no doubt that South Africans will face some hard times in the near future as the global financial crisis continues but, as long as we keep our politics and internal finances under control, South Africans can look forward to the light at the end of the tunnel.
February 2009
This article was written by Paul Wilson
Paul Wilson
Investment Consultant
Paul Wilson graduated with a BSc Actuarial and Financial Mathematics from the University of Pretoria in 2004. He immediately joined Riscura Solutions as a Quantitative analyst and as part of the manager research division. He completed his BSc(Hons) Actuarial mathematics from the University of Pretoria in 2007, and left Riscura at the end of 2008 to join Jacques Malan Consultants and Actuaries in 2009 as a part of the Investment Consulting division. He has 4 years industry experience.
