National Treasury still has a chance to save the economy

As SA grapples with three bruising downgrades to its sovereign credit rating, an economy in recession and increasing political uncertainty, National Treasury can play its role in lifting the country from the economic malaise.

This is the view of Nedbank’s senior economist Nicky Weimar, who said to avoid further damage in terms of further downgrades by S&P Global Ratings, Fitch and Moody’s, Treasury could help to restore investor confidence.

“Part of restoring confidence is to take a less confrontational view with business and start engaging with business. We need better economic policies that encourage economic growth,” Weimar said on Wednesday at the South African Property Owners Association Convention.

SA’s economy is muddling along: gross domestic product (GDP) contracted by 0.7% in the first quarter of 2017 from a 0.3% contraction in the previous quarter – meaning the country is in a technical recession.

Nedbank’s house view is that GDP growth will reach 0.6% in 2017, 1.3% in 2018 and 2.3% in 2019.

Efficient Group chief economist Dawie Roodt argued that SA has been in a recession for longer. “My definition for a recession is an economy that is growing below its potential. If you try to fix a lot of things at once that’s going to force the economy into a deeper recession,” said Roodt.

S&P cut SA’s foreign currency credit rating to sub-investment grade (or junk), Fitch cut both foreign and local currency credit rating and Moody’s downgraded SA’s debt rating by one notch, maintaining its investment grade rating.

“The government would have to position itself as a pillar for the economy, free up the market to drive up capital expenditure and employment creation. They will absolutely have to tackle corruption,” said Weimar.

Tackling corruption means restoring good governance at beleaguered state-owned enterprises including Eskom, Transnet and South African Airways, and avoid further “stupid mistakes” including the estimated R1 trillion spend on nuclear energy.

The big question is whether the blow to the economy would get worse. Weimar said it all depends on how the politics are going to unfold, especially in an election year for the ruling ANC.

“This technical recession still might not be over. There is still considerable downside risk and this would impact future sovereign risk ratings.”

The junk downgrades to SA’s local or rand-denominated debt could have disastrous consequences. Firstly, the government relies on foreign funding to finance its debt as 36% or R600 billion of the debt is funded by foreigners.

The bulk of this finance comes from index tracker funds and the junk downgrade might see the country excluded from major global bond indices including Citi World Government Bond Index.

“Some indices are prohibited from investing in countries with junk status. Investors would be forced sellers, which would result in an estimated R100 billion to R300 billion in foreign capital outflows.”

The good news

The good news is that the world is in risk mode and investors are willing to take on risk. “Capital flows might move to equity markets.  Global risk appetite really drives the value of the rand,” said Weimar.

“If commodity prices can start to rise then we should see SA benefit.  If the political environment stabilises, we should see a recovery. It will be slow because there is a lot of damage done over the past seven years and that can’t be undone in a hurry.”

For Thabi Leoka, the economic strategist at Argon Asset Management, turning the economic fortunes requires implementing policies. “We had the National Development Plan (NDP) that was endorsed in 2012. We told investors that SA’s problems are going to be solved by the holy grail called the NDP,” said Leoka.

“If we had adopted the NDP, it would have triggered some level of growth and certainty.  Our problem is that we tear policies apart before we adopt them and we have done so with every single plan.”

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