Cape Town - Despite all of the negativity around the recent mini budget delivered by Finance Minister Nhlanhla Nene, SA has some positives counting in its favour.
Much emphasis was placed on the slowing global growth and the drop in commodity prices which caused growth projections for the South African economy to be lowered.
Alarmingly, he described the slowdown in growth as structural. Here are some positives to consider:
1) Most of South Africa's debt is rand-denominated
In the recent MTBPS, Finance Minister Nene indicated that the South African government debt to GDP ratio is standing at 47%. This has increased from 26% since the 2007/08 recession, as the government has implemented a counter-cyclical fiscal policy.
Minister Nene is aware that this growing figure is a concern and will have to be addressed. With growth rates slowing down, the government will need to cut back its expenditure to bring the ratio to a more stable figure.
On the positive side, the debt is mostly rand-denominated. The South African Treasury has been smart to not borrow too much money in a foreign currency. Having rand-denominated debt minimises the impact of the weakening currency.
2) The South African Reserve Bank has kept the inflation rate between the targeted 3%-6% consistently for over a decade
The South African Reserve Bank (Sarb) has done an excellent job in managing inflation. In 2000, the Sarb decided to adopt inflation targeting as their policy objective.
In the last 10 years since 2005, South African inflation has only breached the 3-6% target on four occasions. This was in 2007, 2008, 2009, and 2014.
The Sarb expects inflation to be close to the upper 6% target in 2016 as oil prices will start to move higher and the drought weighs in on food prices.
3) The South African Reserve Bank has kept its independence
It is important for any central bank to keep its monetary policy independent from its fiscal policy. When the central bank is allowed to operate independently, it can prioritise price stability over any other needed objective.
The Sarb has kept its independence from the fiscal policy which has given the financial system a lot of stability and credibility.
4) Excellent Financial System
Despite all the challenges South Africa faces on the fiscal policy and political front, the financial system remains very well developed and effectively regulated.
When a financial system is stable, the financial intermediation between households, firms, and government operates smoothly and financial institutions are able to deliver services without causing systematic risk.
The Johannesburg Stock Exchange (JSE), is the largest stock exchange in Africa and allows investors to buy and sell South African shares with relative ease at a low cost.
Throughout history, the JSE has outperformed most other stock markets around the world in terms of investor returns. It has outperformed the US and European stock markets.
5) The weakening rand will benefit the export sector.
The ZAR/Dollar has weakened by 16% for the year to date and reflects the negative sentiment towards emerging markets and commodity producing countries.
South Africa's low GDP growth forecasts and growing unproductive public sector expenditure are contributors to the currency weakness.
However, with the currency at these weak levels, the South African trade deficit is starting to decline as it becomes more expensive to import goods and more beneficial to export goods and services.
* Kirk Swart is an analyst at Overberg Asset Management (OAM), an Authorised Financial Services Provider (No. 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
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