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Cape Town - The October mini-budget will be an important milestone - irrespective of who delivers it - Old Mutual multi managers Dave Mohr and Izak Odendaal said on Monday.
In their view, this is because it will give an idea of whether South Africa can avoid a downgrade later this year, and because if there are sharp cuts to the deficit through tax hikes or spending reduction, it might be another shock to the economy.
The key factors that will determine the extent of a recovery of the SA economy are the direction of the rand, with its important influence on inflation, interest rates and general sentiment, they explained.
"What we really need is a lift in confidence, with consumer and business sentiment at levels typically seen in a recession. Fortunately, the BER’s latest business confidence survey improved in the third quarter, after six consecutive quarterly declines. It is in net negative territory, but at least not declining any further," said Mohr and Odendaal.
All five measured sectors showed an improvement, which the BER (Bureau for Economic Research) argues is also typically a sign of a turning point.
They point out, however, that the survey was largely completed after the "feel-good" local government elections and before recent uncertainty over the future of Finance Minister Pravin Gordhan.
"Unfortunately, political uncertainty could weigh on sentiment, even as conditions on the ground appear to be improving gradually," according to Mohr and Odendaal.
"The second quarter gross domestic product (GDP) bounce is obviously welcome, as it means growth forecasts will be adjusted upwards for the first time in many years - typically a sign of a turning point. It also means that there will be no technical recession - defined as two consecutive negative quarters. However, we are already well into the third quarter."
And third quarter data mixed so far.
The stronger second quarter was driven by recoveries in the mining and manufacturing sectors, while exports have bounced. SA posted a R33bn (seasonally-adjusted and annualised) trade surplus in the second quarter, compared to a R47bn deficit in the first quarter.
READ: SA needs more than smooth talk, Mr Gordhan
Financial crisis
Mohr and Odendaal pointed out that the effects of the financial crisis of 2008 linger on.
"Despite record low interest rates, households are reluctant to borrow and businesses are not investing much - often preferring to use cash to buy back shares - great for shareholders, but not for economic growth," said Mohr and Odendaal.
"The world now needs fiscal stimulus. And yet another defining feature of the past eight years has been politicians’ obsession with balancing budgets, cutting deficits and reducing public debt. This obsession was not a feature of the pre-crisis era, but the final act of a three-decade long explosion in private borrowing."
That is why Mohr and Odendaal are of the opinion that last week’s market sell-off was driven by the fear that monetary policy is reaching its limits.
"While some investors are chasing the perceived safety of developed market bonds – despite the negligible yields – others are forced by regulations to hold them. However, there is another category of investors who will look elsewhere for returns, particularly in high-yielding emerging markets like South Africa," said Mohr and Odendaal.
ALSO READ: Three ways mini budget whacked the rand
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