MEASURING MISCONCEPTIONS

This is the second in a series of articles on the main misconceptions stiffling economic growth in South Africa. The first can be read here. 

As the country’s borrowing capacity deteriorates, expectations for an IMF intervention build. Yet government’s access to capital is unlikely to be threatened soon. Meanwhile the political resistance which impedes the country’s much needed policy reforms can withstand external and domestic pressures until far more economic damage has accrued. The IMF’s influence on our policy makers is likely to be slower and quite different from what many expect.

If treasury bumbling had caused SA’s funding issues, the IMF would be well positioned to assist. Instead, the sophistication of the treasury department debt management has provided space for egregiously counterproductive policies resistant to IMF pressures.

IMF influence is greatest when access to credit or foreign currency suddenly becomes inadequate. Moody’s rationale for not downgrading our sovereign debt rating has largely reflected the country’s debt being prudently composed of many long-dated, rand-denominated obligations. 

Unless global credit markets are roiled or we have a severe domestic shock, SA’s current low-growth, rising indebtedness path could persist until the 2024 election approaches. With unsustainable damage accumulating, creditor influences and prospects for a coalition government should then inspire a pro-growth policy pivot.

As the electoral value of its liberation pedigree faded, the ANC doubled down on prioritising redistribution at growth’s expense. A majority of South Africans are now dependent on the state and the ANC provokes fears that others would slash vital payments. This strategy has paid-off politically while planting defusion-resistant government and household debt time-bombs. 

As most South Africans are poor, over indebted or both, adequate growth must be achieved through boosting competitiveness and exports. This, however, would require an overhaul of ANC policies and messaging. Last month’s parliamentary addresses by the president and his finance minister clarified that no such shifts are under consideration. Rather than pivoting toward high growth, expenditures are to be reduced.

Ramaphosa’s investment drive, supported by big business, presumed that there was adequate domestic purchasing power to attract investment flows which would propel growth. However, as Moody’s acknowledged last week, "We attribute the persistent economic weakness to lacklustre domestic private-sector demand ..." The investment drive needed to be export focused but this requires reforms loathed by the ANC and its alignment partners.

The ANC’s ability to delay a debt crisis includes the composition of government debt and various versions of prescribed assets. A majority being reliant on the state further blunts the IMF’s influence. That almost all of SA’s poor are black, while so many whites are vastly better off, undercuts already tenuous austerity arguments.

The IMF’s recent SA report expresses coherent opposition toward cutting social grants. Thus, for creditors to provide ongoing funding, the bloated government wage bill and SOE support must be contested. While finance minister Mboweni is currently targeting the wage bill, the best outcome he could realistically expect would mix minor concessions on wage growth with less resistance toward reducing the SOE financial haemorrhaging. 

Slower public sector wage growth is necessary but this will further dampen already anaemic growth in domestic purchasing power. Meanwhile, some public sector employees would be too expensive if they worked for free. Eskom showcases the consequences of mixing incompetence with corruption while SAA alerts us to the folly of having SOEs compete with private companies. 

Gauging the underlying structural flaws in our economy requires separately assessing how economic growth is fuelled and how income is distributed. The next component is to understand the transmission path between the two. The dual deterioration of government’s fiscal management and household finances must then be assessed.

Follow-the-money analysis shows that income is redistributed aggressively not just to reduce poverty’s hardships but to grow the public sector - which directly constricts growth. The emerging middle class as well as many low-income households then funnel much of their income to lenders in the form of high interest rates. This prohibits healthy growth in domestic purchasing power. Meanwhile the anti-competitive effects of over prioritising redistribution precludes the only viable high-growth path, surging exports.

Government’s fiscal deficit can’t be fixed without sustained high growth, yet our economic structure is irreconcilable with adequate growth. A preponderance of households are also slipping into debt traps. The underlying economic structure was always going to trigger poverty and debt traps. Patronage, corruption and incompetence brought forward the day of reckoning.

When a country’s access to credit markets or foreign exchange is suddenly curtailed, the IMF can offer emergency funding while demanding politically difficult policy shifts. Ideally, the crisis and restructuring negotiations happen in the lead-up to a national election whereby voters can endorse or reject the product of the negotiations. SA’s economic crumbling can probably be endured, at great cost, until the 2024 election.

To have the public sector and a huge portion of households caught in debt traps while the overall economy is caught in a poverty trap is unusual - particularly given that the global economy has been pummelling poverty in recent decades. That domestic consumer lending has remained quite profitable is a further anomaly.

When a country can’t grow its way out of debt trap, then it is in the interest of the creditors that the debt be “reprofiled”. The same principle holds with consumer debt. Debt must be restructured alongside policies and practices being reformed to unlock growth.

However, SA is not Greece or Portugal. We don’t freely trade with wealthy neighbours. Sustained healthy growth requires surging value-added exports into consumer markets with deep pockets. This can’t happen quickly. To achieve political support for necessary policy reforms, the IMF would likely support - if not encourage - a substantial reprofiling of consumer debts to swiftly spur growth. Progress toward permanently lowering lending premiums for lower-income loans can, and must, accelerate. 

If SA isn’t going to meaningfully expand exports, per capita income growth will remain elusive provoking more poverty. Without expanding exports, achieving even slow growth would require consumers sharply reduce their interest payments by reducing their debt loads, or accessing cheaper loans, or both. The Marikana tragedy spotlighted how as workers maximise their access to expensive debt, they need wage increases well above inflation to avoid purchasing power contraction.

IMF economists routinely favour subordinating bank shareholder interests to the greater good. The ECB’s negative interest rate policies cost European banks about $10 billion per year. Debt restructurings and economic stimulus programmes are often harsh for bank shareholders.

SA’s economic policies are so misconceived that - if political obstacles were overcome - they could easily be rewritten to sharply improve the country’s growth trajectory. Yet the best way to kickstart growth might be to permanently reduce margins on consumer loans. This should involve lenders freshly assessing their environment followed by much innovativeness. 

The IMF’s credibility and its predilections for punishing bank shareholders would suit the ANC which has been exploring prescribed assets, erosion of property rights and consumer debt relief. Prescribed assets undermines the IMF’s clout. Putting property rights in play means the ANC could take it off the table as a concession. The IMF and the ANC could agree a large consumer debt relief bill is needed.

Fleeing debt traps is a precondition for SA escaping its suffocating poverty prevalence. That bank shareholders are significant political contributors reflects their inherently weak political position relative to unions and other broad constituencies. Nor is their status as top taxpayers a formidable shield. 

Many civil servants service large and expensive debt loads while anchoring their extended families’ financial viability. Mboweni’s efforts to reduce government’s wage bill should spur many shifts, including how government interacts with the IMF and our domestic lenders.

Shawn Hagedorn is an independent strategy adviser shawn-hagedorn.com