Rate hikes will be 'path to damnation'

Rate hikes will be 'path to damnation'

2014-02-17 13:14

Stellenbosch – More interest rate hikes by the South African Reserve Bank (Sarb) will put South Africa on a path to damnation, according to Prof. Brian Kantor, chief economist and investment strategist of Investec.

“We have made this mistake before. There is no justification for further interest rate increases in South Africa,” he said at an event hosted at the Spier Wine Estate by the Gordon Institute of Business Science (Gibs).

 “Yet there is expectation in the money market of more interest rate increases by Sarb over the next 12 to 18 months,” said Kantor.

“It would be a bad idea in my opinion. SA’s history shows no predictable relationship between the value of the rand and interest rates.”

The speed of economic growth in SA is slowing down. To think of higher interest rates in these circumstances is ludicrous, in his view.

“Raising interest rates can damage the domestic demand – 60% of SA’s economy - which is just too weak at the moment,” he warned.

He said SA is part of “the emerging market universe” and depends on investors’ risk tolerance towards emerging markets.

“SA must, therefore, become more impressive and attract global investors. We need them,” said Kantor.

“In my view economic development happens when people are left to get on with it and enjoy the fruits of their labour to a large degree. That is economic freedom as we have in the developed world.”

Foreign investors look at the fiscal deficit when they look at risk and SA needs a large influx of capital to balance the deficit.

Export opportunity

The solution for SA must be to take advantage of export opportunities and convince Sarb not to try and fight currency changes by increasing interest rates, said Kantor.

“Should SA not rather look at becoming a tax haven?” he asked.
Due to the weak rand South African exporters have an opportunity to have an extra margin for their exports.

“The question is whether they will take the gap and if the labour unions will permit this,” said Kantor.

The weaker rand is also having a positive impact on the tourism industry in SA.

“Successful businesses attract capital and growing economies attract capital. If you want capital, you must grow the economy. If you slow the economy, you undermine the case for investment.”

Labour market

To him the essential weakness of the South African economy is its dysfunctional labour market.

“Let supply and demand for labour talk,” he said.

Kantor foresees that the reliance on workers in the mining industry will become less and less. Robotics will replace workers.

“Yet, the apparently short-sighted union leadership are rather competing with each other,” he said.

“The biggest stumbling block to improving consumer spending is the state of the labour market. Yet the rate of dismissals from formal jobs has reached a ten year high.”

National budget

SA must control the growth in employment benefits of those working for the government, Kantor warned.

“Transformation of the middle class in SA was really boosted by government employment to a large degree. Between 20% and 30% of the new middle class works for the government,” he said.

SA needs a smaller deficit by means of a slowdown in government spending.

“South Africans do not save enough. The only savers are businesses. Therefore, businesses should be taxed less if you want to grow the economy,” he said.

  • Michael Ross - 2014-02-17 13:26

    Exceptional suggstions from Prof. Brian Kantor!! If businesses are taxed less, they can reduce their cost-to-consumers, which in turn also helps consumers save money, freeing up expenditure on basic necessities, and eventually, enabling additional purchases, such as luxury items, or greater investment and savings opportunities. It would greatly improve the economy and the financial situation in the average middle-class to lower-class domestic household.

      Jan Sadie - 2014-02-17 13:33

      Agreed that this is a good idea in theory. But : "If businesses are taxed less, they can reduce their cost-to-consumers". This will never happen... It does not make business sense?

      Kiss123 - 2014-02-17 14:44

      you will be taxed more , NOT less, how else will the government buy votes= grants. Make those that work well work harder .

  • Louis Krüger - 2014-02-17 14:03

    “In my view economic development happens when people are left to get on with it and enjoy the fruits of their labour to a large degree. That is economic freedom as we have in the developed world.” Last time I checked the developed world was still struggling under its debt load - caused by extremely low interest rates. If you keep rates too low for too long you will eventually kill your economy too.

  • Vaughan - 2014-02-17 14:18

    Nice if this could happen. However with the massive government SA has, larger than the US Federal government, the government needs every last cent of tax money to keep going. This means that it cant afford to cut taxes which means growth will continue to slow and the rand will continue to be under pressure. And in this case the only way to keep the rand from going back into free fall is to increase interest rates.

  • Brad Smith - 2014-02-17 18:22

    huh all due respect mister kantor you say that south africa must attract global investors. i do agree wholeheartedly with that but lets be honest with strikes and violent demonstrations going on not to mention corruption and crime that is side plus the constant threat of nationalization, an investor needs a huge incentive for taking on that kind of risk and thats why only high interest rates will keep overseas money here.

  • Christiaan van den Heever - 2014-02-18 08:41

    Interest rates should be in line with the rate of inflation. If not most old people who saved their life long to have a stress free old age will end up on government handouts.

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