It’s complicated. That’s how one can describe SA’s economic outlook for the year given the events of the past three weeks. There are encouraging developments globally, though they will not improve our economic growth prospects. And there’s just too much noise locally, devoid of tangible progress on the economic reforms proposed by the Treasury in late 2019 as far as implementation is concerned.
There are some silver linings globally, with the US and China reaching a phase one trade deal this week that promises no further escalation of trade tensions. However, global trade economists in the know point out three things that in effect make this no game-changer. First, this trade deal does not reverse the affect of trade tariffs that were implemented until September 2019. Second, the global value chains involving China have already shifted and will not revert to their structure before the trade tension. Third, a lot more will need to be done before global investment accelerates.
The other encouraging development concerns Brexit. Boris Johnson’s decisive victory in the UK polls in December paved the way for the passing of legislation that improved the chances that Brexit will happen come January 31. Though this improves certainty, reflected in the strengthening of the pound relative to the dollar, a lot still needs to be negotiated to get the final shape of the relationship between the UK and the EU.
For SA and other emerging markets, the US Federal Reserve’s monetary policy stance and the direction of the US dollar matter a lot. In this regard the jury is still out, but expectations are that the dollar should weaken, which would be positive for emerging market currencies, inclusive of the rand.
The direction of the rand is complicated by domestic factors, which include anaemic economic growth due to the instability of the power supply, government expenditure cuts, low consumer demand and the potential of a credit rating downgrade to subinvestment grade. The credit rating downgrade is largely priced in by financial markets, such that the affect on asset prices is likely to be limited. However, the macroeconomic adjustment after the downgrade to subinvestment is usually painful and lasts a long time, depending on the speed and extent of the policy response.
I am doubtful that even the actual credit rating downgrade, when it happens, will be the trigger that expedites economic reforms if policymakers outside the Treasury and SA Reserve Bank still don’t grasp the economic crisis that follows a credit rating downgrade to subinvestment status. If they did, the discussions would no longer be about policy choices but how to implement, and concerted efforts would be made post haste.
Compared with other emerging markets, especially Ethiopia, SA lacks focus and intent. That’s how international investors, whose capital dines on predictability and certainty, will look at SA. There are just too many debates about the things vested and interested parties in society disagree on that stand in the way of doing the things society agrees on. This, if it persists, will become the making of the next lost decade, just like the proclamation of the decade of the cadre became the root of the state capture years.
Selfless leaders in the government, private sector, labour and civil society must rise and activate actual outcomes, to use the tagline of this week’s Business Unity SA Business Economic Indaba 2020. If we fail to do that, the economic crisis will be the breeding ground of civil unrest and a political crisis. The chief players in this will be the Fees Must Fall generation, which got free tertiary education from 2018 and will soon finish their degrees and want jobs. Is the economy ready for them?
• Mhlanga is chief economist at Alexander Forbes.
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