It is fair to say that the government has been "behind the curve" in its response to the economic recession. This means it failed to act soon enough and aggressively enough when sufficient data existed to do so.
During the Global Credit Crisis in the latter part of 2008, the SA government gave assurances that South Africa was "immunised" from the global meltdown. This was premised on:
- the robustness in banking regulation (which effectively monitor all of a bank's activities by not allowing it to engage in unregulated banking activity),
- the continued implementation of exchange controls (which limit capital flight), and
- the introduction of the National Credit Act (which effectively guarded against reckless lending by banks).
We agree that this position was correct, and the evidence has borne that out.
However, the South African economy was in grave danger of recession itself as its key trading partners, Europe and North America, were in economic turmoil. Furthermore, commodity prices had collapsed which undermined the economic viability of many exporter industries, and especially South African gold miners.
Instead of accepting the reality of the looming crisis, government was making unrealistic promises to win the elctions. President Zuma proclaimed that his administration would create 500'000 new jobs this year.
In his February labelling of the national budget, the Minister of Finance gave a precise and accurate account of the impact of the global economic crisis. Europe and North America would slide into recession and India and China's growth rates would halve to the lowest rates in 20 years. Despite this, the Minister still forecast a positive growth rate of 1.2% for South Africa in 2009. When the data were released for the first quarter, they showed that the economy contracted by an unprecedented 6.4% in the second quarter. The bitter irony that these data relate to the very period when the Minister made his forecast is not lost on us.
The Minister carried on detailing the extraordinary measures implemented by our trading partners in order to deal with the crisis. Amongst others, this included the USA cutting interest rates to almost zero, and embarking on massive infrastructure spending. These are the two effective weapons a government has in fighting the recession. When speaking to South Africa's pillars; on the first he stated that lower inflation should see "moderating interest rates". On the second he only increased infrastructure spending by 3% (a rate lower than inflation) and was even brazen to gloat that while other countries were still planning projects, South Arica was already digging.
When we review the outcome of government's policy, it comes as no surprise that it is "behind the curve."
Against the promise of 500'000 new jobs the economy lost 180'000 in the first 3 months alone. No revision has been made to this number, meaning that 680'000 jobs must now be created in 9 months. We consider this to be improbable.
Interest rates have also fallen too slowly. While the repo rate was cut from 12% to 7% over 8 months, it is now only as low as it was in 2005 when there was no crisis to combat. But even this is a flattering picture. In reality banks have re-priced their credit to consumers; where a person may have paid prime-less one percent on a her home loan, she now pays prime plus one percent; meaning she only receives 3 percentage points relief while the government claims it has delivered 5. As a final assault on the consumer, access to credit has been all but impossible. Where a bank offered 100% loan on homes, it now demands a 30% deposit. This in a country where three-quarters of those employed earns less than 10'000 per month. As a consequence of "high" interest rates and tighter access to credit both the motor industry and the property sector have been done untold harm. At best, the current extent of interest cuts has come as a modest relief to debt-burdened consumers and has not been enough to spark new investment activity.
In the face of this, we believe that the upcoming inflation data will show that there was, and still remains, significant scope for further interest rate cuts. This is probably more crucial now than before, as we believe that the infrastructure pillar to the economy will be severely compromised.
As a consequence of the rapid deterioration in economic growth, we believe the government will grossly undershoot its budgeted revenue targets. Based on the data for the first four months of the fiscal year, the budget deficit when Minister Gordhan tables his maiden budget could be a colossal 8%. To put it in context; such a deficit (the difference between income and expenditure) is more than the total budget for Education, Healthcare, Labour, and Social Development (which includes social grants for 13m South Africans) combined. This will put government into a very uncomfortable option set:
a) It can keep spending unchanged and look to fund the deficit through borrowings. Unfortunately this will only defer the problem, as the increase in debt costs in future years will nullify the ability to spend on priority items. Furthermore we raise serious doubts about the country's savings pool to absorb such a quantum of borrowing. This would then necessitate foreign funding, and an unnatural umbilical cord to the global economy which itself is a patient in intensive care.
b) It will have to raise taxes. This would be absurd as tax payers are already suffering in a recession. Perversely, government is currently mooting the idea of raising taxes to fund the proposed reforms to healthcare.
c) Finally it will have to cut expenditure. We believe that this is the only real alternative that government will have. While it is the most prudent, this is the severe compromise to the pillar of infrastructure spending. So after bragging about how our shovels are already in the ground, we fear that within a year they will be collecting dust in abandoned warehouses.
We will watch the Medium Term Budget Policy Statement very closely in October to see how intellectually honest the government will be with these realities.
This economic review is incomplete if it does not address "bread and butter" issues. This week the Competition Commission celebrated its 10th anniversary with a customary cocktail function. Amongst its successes it counts the breaking of the bread cartel. However, it is disturbing to note that over the past 10 years, the price of bread has risen in every single year and has never fallen; this despite seasons of bumper crops and lower input prices. In fact, the price of bread has never fallen for over 20 years, meaning that there is no discernable difference to the man in the street with or without the Commission's work. We suggest that the Commission defer its toast (pun unintended) until the price of bread actually falls.
Phillip Dexter MP is the Head of Communications for the Congress of the People
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