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This too, shall pass

Now is the summer of our discontent… (with apologies to William Shakespeare)

We all know that most of the key macroeconomic variables are moving in the wrong direction – economic growth is trending towards 1%, inflationary pressures are working up steam, the current account deficit is uncomfortably wide, net financial inflows have declined significantly, the rand exchange rate is at an all-time low, and job creation has stagnated.

Meanwhile, poverty levels are high, and income remains unevenly distributed. Add to this toxic cocktail changes in the global economic architecture and South Africans would be excused for feeling that they are indeed living through a “summer of discontent”.

This year might turn out to be one of the most distressing in the last two decades for consumers, producers and workers alike, as real incomes stagnate at best.

This unfortunate mixture of circumstances results in virtually no manoeuvrability for policymakers.

The fact is that concerns about fiscal sustainability have vengefully re-emerged. The ratio of government debt-to-GDP has increased significantly – from some 25% in 2008 to 45% in 2015 – driven, inter alia, by a marked increase in the share of government spending in GDP (attributed in no small measure to large salary outlays on a bloated civil service, the cost of sustaining a sizeable social welfare system, and repeated rescue packages for inefficient state-owned enterprises).

The harsh truth, therefore, is that investors have become disenchanted and disillusioned by the current unfortunate juxtaposition of macroeconomic and financial realities.

They are concerned that the high levels of creeping debt may become financially and politically unsustainable. As a deficit nation (with a disturbingly low level of gross savings for its size), South Africa is capital hungry. It is therefore vital for SA that foreign capital should be forthcoming and that the cost of that funding should be kept as low as possible.

To this end it is crucial that the relevant policymakers show an intent and commitment to ‘get the basics right’. In the short term, that is about fiscal (and monetary) discipline, and investor-friendly and predictable, surprise-free policies.

This means that we should expect the minister of finance to table a Budget Speech in a few weeks’ time that displays fiscal restraint (i.e. narrower budget deficits over the next few years), that shows a commitment to eliminating wasteful and unjustified government spending, and that confines ‘hand-outs’ to the humanely minimum.

Unfortunately, with a shrinking tax base, this also implies an increase in one or more types of taxes, with personal income tax hikes the most likely source of additional state revenue.

All very painful, and certainly not growth-inducing, but the last thing we can afford now is a descent into fully-blown ‘junk bond’ status, with the concomitant implications for both the accessibility to and cost of foreign lines of credit.

…made glorious winter by this sun of York (with further apologies to William Shakespeare).

Shakespeare’s quote (from Richard III) actually alludes to the fact that a time of unhappiness is past.

For South Africans it is worth considering that never before has a period of economic stagnation not been followed by a phase of recovery and growth – although the timing, strength and duration of the latter is not predictable.

So, while in the short run we are in survivalist mode, it is also important not to be caught napping when the economy does recover. It is therefore a time for debt consolidation (private and public); for enhancing efficiencies and productivity; for honing those managerial skills needed to convert innovative ideas into commercial opportunities. ?

It is a time for scanning the environment and exploring new markets – internationally, in the rest of Africa, and at home. And, as we look beyond and through the current sobering situation, we should remind ourselves that many investors want a positive story.

Investors are aware of the many real and latent positive features of the SA economy – strong financial institutions, a nascent demographic dividend, a fairly large middle-income segment, and in many ways the most advanced economy in sub-Saharan Africa (especially in respect of technology and infrastructure).

Above all, we need to visualise the longer-term picture, not only fixating on the current economic woes and turbulence.

*André Roux is professor in Economics at the University of Stellenbosch Business School (USB).

This article originally appeared in the 11 February 2016 edition offinweek. Buy and download the magazine here

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