Over the past decade the annual growth in real GDP has averaged a miserable 0.69%, and the growth in household disposable incomes has grown by an immiserating 0.46% a year on average.
By sharp contrast, the increase in the wealth of South Africans has been impressive.
Net South African wealth held offshore was substantially negative before 2014 but amounted to more than R2-trillion by 2024, a result of capital gains realised in portfolios, rather than net inflows into assets under management.
Relaxing forex controls has worked very well for South African balance sheets.
The income received from assets held abroad still lags well behind the payments of dividends and interest to offshore investors, an income gap that has remained wide and is a major contributor to the deficit on the current account of the balance of payments.
South African issuers of debt or equity pay out at a far higher rate than we receive. Currently the annual yield on South African securities held abroad is over 5%, compared with the 2% yield received (measured in rand, which is expected to lose value over time).
It is better, perhaps, to be a lender with a strong balance sheet than a borrower. Yet capital inflows from abroad used to fund capex would be most welcome. Both the savings and capex rate in South Africa are unsatisfactorily low, a symptom and a cause of slow income growth.
Slow growth in incomes and in the demand for additional goods and services discourages scaling up production and capex to do so. Faster growth would stimulate capex, improve returns on capital invested and attract the foreign capital to fund that growth.
It is striking that when the economy grew far faster in the mid-2000s, the ratio of capex to GDP rose to 22%; it is now 14%. The widening gap between capex and domestic savings was closed — as were the deficit of the current account and the deteriorating balance of trade of the balance of payments — by larger net inflows of capital.
Inflows of capital
Faster growth in spending widens the gap between exports and imports and the current account deficit (an unnecessary concern) but will prove possible only when funded by inflows of capital. The capital makes possible the current account deficit. Current account deficits and capital inflows are most helpful when growth is accelerating.
Faster growth must be accompanied by an increase in the demand for goods and services, and imports add to the supply of goods and services. Demand equals supply is the national income identity. Both sides matter, and faster growth becomes possible without inflation should the exchange value of the rand hold up.
The prospect of faster growth is likely to encourage capital inflows to fund any widening of the current account deficit and help stabilise inflation, as it did in the boom years 2002-07. Faster growth with less inflation is very possible should the global capital market approve of the improved growth prospects and supply the capital that supports the currency.
It is surely apparent that shocks to the rand-dollar and other exchange rates lead to inflation in both directions, as will happen again after the oil price shock. Policy-determined interest rates are likely (misguidedly) to rise to further inhibit growth in spending, which is already under pressure from higher prices. Unfortunately, the case for investing in South Africa has deteriorated, as has the outlook for inflation.
Monetary policy
Faster growth over the past 10 years has been an economic impossibility because the demand side of the economy has been so severely and consistently depressed by highly restrictive monetary policy. And faster growth — anything above 2% a year — will remain an impossibility unless interest rate settings become more accommodating of higher levels of spending by households and firms, accompanied by faster rates of growth in the money and credit supplies.
The growth in the real supply of bank credit since 2016 has averaged less than 0.5% a year, and M3 money supply has grown at an average annual rate of 1.9%, far too slow for comfort. Unless these key monetary growth rates are allowed to accelerate, faster growth will not happen; indeed cannot happen.
As before, inflation will depend mostly on the exchange value of the rand, which will be decided in the Strait of Hormuz, not in Church Street, Tshwane. Without lower interest rates, the supply of money and credit will continue to grow as slowly as it has over the past decade and frustrate any growth potential supply-side reforms may generate.
An increase in supply requires an increase in demand.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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