The government could make a series of new economic policy commitments next year on the macro and micro front.
Whether it will turn proposals into policies is not clear yet, nor is whether it would make much difference to economic outcomes if it does. But investors are eagerly awaiting announcements, or at least signals of intent.
On the macroeconomic side, in other words fiscal and monetary policy, a new fiscal rule has been proposed and a new, lower inflation target to anchor monetary policy.
The National Treasury raised expectations in February’s budget when it said the government would propose a “binding fiscal anchor”, after extensive consultation, to chart a sustainable long-term path for the public finances.
Things have moved along a bit though and the proposal no longer seems as imminent, or as hard-edged.
The Treasury has committed to release a discussion paper on a new fiscal anchor before the end of the current fiscal year in March, possibly even at the February budget. Its director-general, Duncan Pieterse, says a fiscal anchor might be important for the long term.
But in the short term, the Treasury still needs to convince the market that it can deliver on its promise to stabilise the public debt level next year, and restore fiscal credibility that was lost in the years when it kept missing its targets.
Even the IMF, which has long urged SA to adopt a fiscal rule in the form of a debt ceiling, has lately taken a more nuanced approach. In the comment it released last month after it visited SA to research its annual Article Four report, it again recommended a fiscal rule anchored in a prudent debt ceiling — of about 60%, in line with peers — to underpin fiscal consolidation and support policy credibility.
But it qualified this saying such a rule should build on the Treasury’s existing expenditure ceiling. And it needed an independent body to assess compliance. So let’s see what the Treasury has to suggest early next year — and how it goes down. It might prove less controversial than the proposal to lower SA’s inflation target, now at 3%-6%.
Reserve Bank governor Lesetja Kganyago has been using almost every platform lately to push hard for a lower inflation target, possible a point target of 3%, to bring SA in line with its emerging market peers and get inflation down to sustainably lower levels. He’s often referred to the “original mistake” not long after inflation targeting was introduced in the early 2000s, when the government retreated from its original plan to lower the target range to 2%-5%.
He’s urged that “price stability”, as defined in the constitution and elsewhere in the world, means keeping inflation closer to 2%-3% than 4%-6%.
With the inflation rate now running below the bottom of the target range at just 2.9% for November, many in the market believe the Bank should grab the opportunity to lower the target now. That would mean going slower on interest rate cuts, and cutting by less altogether.
Many in the market believe the Bank is quietly doing that anyway in anticipation of a lower target next year. And it continues to do so despite vehement denials from Kganyago and his team that the Bank is working with a secret target.
A new target would require agreement between the finance minister and the governor. A technical team is working on it, via the macroeconomic standing committee that includes both sides. The Treasury has promised an update with February’s budget.
Whether the minister will have the appetite to push this one through is a question. And while it might add cred, the idea is not universally loved in the market. Equity investors worry that keeping interest rates higher for longer could delay recovery in the economy and in companies’ earnings.
Without functional local government there’s little chance that SA can realise higher rates of investment or growth.
The idea of higher-for-longer rates could worry consumers even more — even though Reserve Bank research shows that the Bank managed to lower the effective target to 4.5% after 2017 without causing economic pain.
There’s concern too about which part of the economy would have to take the pain. Administered price inflation — for services whose prices are set or regulated by government or public entities — runs consistently higher than for the rest of the inflation basket.
RMB Morgan Stanley estimates that assuming administered price inflation (excluding fuel) of 6.5%, the remainder of the basket — essentially private sector inflation — would need to average 2.5% inflation at most for the blended inflation rate to be at 3%.
Economist Andrea Masia notes that is not entirely unrealistic — SA was on track to get to those levels before the post-Covid supply disruptions. But he argues the burden on the private sector would be significant unless the public sector bought into the new target.
Kganyago tends to dismiss concerns about public versus private inflation, with administered prices making up just 16% of the inflation basket. Indeed, the Bank is believed to be hoping a lower target will force the public sector to rein in its own steep price hikes.
Let’s see what materialises in 2025. As economists say, macroeconomic policy can only smooth the cycle not lift the growth rate sustainably. While sound macro policy is necessary for higher growth, it’s not in any way sufficient.
Which is where the micro comes in, specifically Operation Vulindlela (OV) and the growth-boosting reforms it's working to unlock.
This has been a year in which OV’s successes, particularly in energy, have become the poster child for the reform process. OV will continue to work in its priority areas of energy, logistics, water and visas.
But there are proposals to extend the unit’s remit in three areas. One, the presidency’s Rudi Dicks told investors recently, is dynamic and integrated cities, with a focus on transport and housing. Another is digital transformation, including a digital identification system and digital payments, building on models such as India and Brazil’s. The third and probably most difficult is one, which business has also flagged as critical, is local government.
Without functional local government there’s little chance that SA can realise higher rates of investment or growth. The proposed reforms would be about improving the performance of water and electricity utilities but also about the appointment of officials.
If the cabinet approves the new OV phase 2 reforms we can expect to see the details in President Cyril Ramaphosa’s state of the nation address in February. Let’s see.
The risk is that OV dilutes its efforts too widely on reforms that are even more politically complicated and challenging than those it has undertaken so far. And there’s still much to be done just to get all the existing reforms to happen, and make sure they gain traction.
Next year’s narrative will be closely watched. But the real test will be whether the economy can grow much faster, and keep growing, and whether the state can deliver better for its citizens.
Happy holidays.
• Joffe is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.