South Africans, surprisingly, have become large contributors to the global savings pool, with $10.7bn (R169.7bn) invested abroad over the past three quarters, equivalent to on average 4.3% of GDP. From 2010 to 2019 SA raised an average of $3.25bn (R35.7bn) of foreign capital each quarter, equivalent to a negative 3.6% of GDP. We are therefore now less dependent on foreign capital, with one deficit — a fiscal deficit — but is this good or bad news?
These flows abroad have come at the expense of expenditure on capital goods, which is now equivalent to 15% of GDP. The savings rate to GDP, at 17.3% in the first quarter of this year, has held up much better than the investment rate. The difference between savings and capital expenditure is equal to the current account surplus on the balance of payments, which is equal to the capital outflows — now strongly positive.
The rate of investment to GDP averaged 19.3% per annum between 2010 and 2019, and the savings rate was 17.3%, both unsatisfactorily low and growth-restricting. Had we succeeded in growing faster the government and business would have no difficulty attracting capital from foreign and domestic sources on more attractive terms, to fund a higher rate of profitable growth and income-inspiring investments.
The latest SA economic growth news released on June 29 is not encouraging at all. The pace of the recovery of the economy has slowed sharply. Real GDP grew 13.7% in the third quarter when recovering from the 16.6% decline registered in the second. It grew by a minimal 1.43 in the fourth quarter and slowed further to 1.13% in the first quarter of 2021.
The slower growth has widened the gap between what the economy might have produced without the lockdowns, and what has been produced. And the latest lockdown will have added to the enormous sacrifices of income made so far. The losses of output and incomes — the difference between actual and pre-Covid-19 potential output — could be the equivalent of 25% or more of the potential GDP in 2021 — that is more than R1-trillion in money of the day, and mounting.
Money supply M3 (bank deposits) in May 2021 was up a mere 1.26% on the year before, and bank credit supplied to the private sector has declined 0.42% year on year. This has been a strong headwind for the economy. The economy cannot realise anything but tepid growth in such monetary circumstances. Yet interest rates are expected to add to the strength of these headwinds.
Money market rates are expected to increase by more than 100 basis points over the next six months, and the term structure of interest rates indicates that the rate on a one-year loan to the government will nearly double over the next three years from 4.64% to 8.2% per annum.
The SA Reserve Bank, in the year of its centenary, appealed to the government to lower its debt service costs by doing the right things, a sentiment one fully shares. Without lower long-term interest rates other government spending is sacrificed to pay the interest bill, as the Bank warns.
But more important, the incentive to add to the capital stock will remain restricted given high long-term interest rates. An average SA firm contemplating additions to its plant and equipment is required to return a demanding 9% real return on its capex.
That is, a return at least equal to the government bond yield of 10% plus 5% for equity risk, less expected inflation of 6%. This above all needs to come down if we are to grow faster.
The Reserve Bank would do well to reflect on what it might do now to promote the growth necessary to reduce SA risks and long-term interest rates. The answer is surely obvious. The Bank should not allow short-term rates to rise, and do what it can to increase the supply of money and credit, without which growth in spending and output cannot materialise.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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