SA is near the top of the global league when it comes to the rewards for holding money. About 3% after inflation is now on offer. Only Mexico has higher real short-term interest rates. SA is also close to the bottom of the global third-quarter 2019 growth league. This is no coincidence. It is the result of destructive policies.
Such an unnatural state of economic affairs — still very expensive money — combined with still highly depressed economic activity, has clearly not been at all good for SA business. The average real return on invested capital (cash in-cash out) has declined sharply, by about a quarter since 2012. Companies have responded by producing less, investing less, employing fewer workers and paying out more of the cash they generate in dividends.
GDP at present current prices is now growing at its slowest rate since the pre-inflationary 1960s — at about 4% a year. This combination of low GDP inflation well below 4%, yet with high interest rates, automatically raises the ratio of national debt to GDP. And makes it much harder to collect taxes that are strongly related to nominal growth rates. Low inflation combined with high borrowing costs for the government and others — because inflation is not expected to stay low — is an economically lethal combination of events.
Only actions by the government that clearly indicate that it is heading away from rather than heading inevitably to a debt trap — that would mean printing money and so much more inflation in due course — can permanently reduce the inflation expected and bring down long-term interest rates. Debt management is a task for the government, not the Reserve Bank.
The JSE small-cap index has lost 40% of its value of late 2016. Since January 2017 the JSE all share index is down by a mere 7%. An equally weighted index of the SA economy plays is down by 22%.
My new year’s good wishes for SA business include that it could transform its prospects and with it the prospects of all who depend on the SA economy — to which business is the most important contributor. It is a wish that those in the government and its agencies should recognise that without a thriving business sector the economy is doomed to permanent stagnation and behave accordingly. Economic growth is transformational and inclusive. Stagnation is just that. Nothing much happens — especially for the poor — stuck with deprivation.
Turning over all wastefully managed state-owned enterprises to private control (there are no crown jewels) would greatly improve performance and generate much cash and additional taxes with which to reduce national debt. Any sense that this might happen would bring long-term interest sharply lower and immediately reduce the returns required of SA business and lead to more investment.
The wish for business success in 2020 is that the government will cut its spending and raise revenues from privatisation rather than raise tax rates. There is no scope for raising tax revenues without faster growth. Higher tax rates will depress growth further. The wish is that the Treasury knows that only cutting government spending can avert the debt trap and has the authority to act accordingly.
SA business would benefit from lower short-term interest and mortgage bond rates under Reserve Bank control. Lower interest expenses would help stimulate the spending of households. They could help get business going. It is my wish for business that the Reserve Bank would do what is most obvious and natural for it to do. To act naturally and decisively when both inflation and growth are pointing sharply lower.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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