I made the point in an article last month that the Treasury is awash with cash, which raised some readers’ hackles. How could I say such a thing when all indications are that SA as a country is broke?
Looking across domestic financial markets the bulls are back, in defiance of the dire economic backdrop. We are panicked about the enduring economic recession, rising debt levels and the prospect of a third wave of Covid infections, yet the all share index (Alsi) is at a record high, the rand is stronger than before the Covid-19 crisis and bonds are at mid-2018 Ramaphoria levels. Is the crisis over?
As at January 31 the Treasury was sitting on R378.4bn in deposits, its highest cash balance on record. The government’s year-end cash position looks set to be more than R100bn higher than the October medium-term budget policy statement estimate. This situation has arisen because:
• The economy was not as weak as feared so tax revenues are higher than expected, and high commodity prices led to particularly strong revenues from companies in the sector; and
• The Treasury managed to raise more money in the bond market than it expected.
What the government decides to do with this windfall will be clear when finance minister Tito Mboweni tables his budget next week. Beyond the short to medium term, SA remains a high-risk market. As the character in Ernest Hemingway’s The Sun Also Rises put it, he went bankrupt “gradually, then suddenly”.
Bankruptcy is a complex process. A debtor transitions from solvent to insolvent to illiquid/default. How you proceed from solvent to bankrupt depends on positive and negative feedback loops, influenced by endogenous and exogenous factors that can speed things up, slow them down or bring it all to a halt.
SA is somewhere between insolvent and illiquid, but global reflation policy settings have slowed the negative feedback loops that were at play into March 2020. However, policymakers have to use the opportunity created by the current global policy settings wisely, lest we find ourselves in crisis again when the policy normalisation process starts in developed economies.
SA is now a “pay-as-you-go” tactical investment, as opposed to one in which you “contract” for the long haul. It takes growth to incentivise long-term investment and this economy is a perennial underperformer. Like normal South Africans, portfolio investors are sceptical of the government’s ability to deliver on growth-enhancing structural reforms. However, being short SA portfolio assets could be a pain trade for investors measured against benchmarks and peers, as global reflation buoys risky assets everywhere.
Even then, expect that capital inflows will be of a lower quality, with shorter investment horizons and unlikely to extend beyond liquid financial assets. This aligns with the observation made by Reserve Bank governor Lesetja Kganyago that a fall in the credit ratings below investment grade would lead to the country attracting only more speculative types of capital inflows. The recent inflows into domestic financial markets and the bullish price action should be seen in this context.
How we use the policy space that has opened will inform whether we have a riskier economy in the future. The prudent thing would be to hold the line on fiscal policy and allow borrowing, and thus borrowing costs, to drift lower. However, the Bank can adopt a more dovish policy stance. The probability of runaway inflation seems low in the context of currency benefiting from a current account surplus and foreign inflows.
The economy needs all the support it can get, especially when fiscal policy expansion is not an option. At the very least, that the Bank will forecast rate hikes via its quarterly projection model, a move that can be likened to tightening via signalling, looks out of place. Developments since the beginning of the year are supportive of more risk-taking by the central bank.
• Lijane is a fixed income sales trader and macro strategist at Absa Capital.
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