Budget 2020: SA will not manage a sub-investment grading so impress us Tito Mboweni
JOHANNESBURG – The Fundamental to South Africa’s case for new bailout terms is the narrative reinforced by its current economic travails – that it has been a victim of excessive austerity. This consensus aside, the new agreement on a New Economic Plan that will inspire economic development model and tackle inequality for South Africa requires overcoming two hurdles.
First, we must concur on how to approach the country’s fiscal consolidation. Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of the South African society. We need to accept that the National Development Plan has failed and we need to use systems thinking while designing new economic policies to ensure maximum outcomes as anticipated.
I suggest that the New Economic Plan must focus mainly on economic development and economic expansion instead of a micro outlook of economic growth. The country has enough resources to be prioritised to the Production Possibility Frontier or curve to drive the economy to an attractive future nation that’s resilient.
The recommended reforms are aligned with the Political risk, Regulatory risk, External risk, Fiscal risk, Economic risk that limits the country to experience economic development, disruptive innovation to pave for small businesses and economic expansion. It’s crucial that investors and South African citizens remain calm and make informed choices during this painful period of economic crisis and poor labour markets.
South Africa will not manage a sub-sovereign investment grading hence there so many negotiations about reforms and sometimes adjustments for implementing reforms, reflecting at equities, over the last four to five years, South African equity investors have been disappointed. The backward forward analysis doesn’t portray the country managing recession or sub-sovereign investment grading and I, therefore, maintain my position that downgrading will lead to disinvestment and our bond market will be less subscribed because of poor economic management and denialism.
South Africa will never have tools or systems to manage investors preferences and behaviours when their global markets advisors are asking them to withdraw from investing in bonds and equities markets.
Risk mitigation and market calculations
Talking at CNBC Africa 2016, Miyelani highlighted that even though the South African Capital Markets is always ahead with risk mitigation and market calculations to de-risk different financial markets impacts, looking at the external measures from investment withdrawals in bonds and equities, we will not manage and also we have family offices and institutional investors that are limited based on their investment principles to investing in sub-sovereign rating and other downgrading based on their investment strategy.
The three credit rating agencies, S&P Global, Moody’s, and Fitch Group cited a need to quickly fix the economic reforms and also Business Unity SA appreciated the postponement to allow The country to prepare itself for the recommended reforms to lead the nation to an economic trough, peak and expansion.
The International Monetary Fund (IMF) in their 2019 June report, warned that South Africa’s public finances would deteriorate further and hurt growth prospects when the new administration failed to take bold decisions to reform the economy and investments would fail to produce it’s expected interest rate of return and economic growth would remain weak in the medium term, and we have observed this prediction early 2020, as both the World Bank Group and IMF had reviewed South African gross domestic product (GDP) growth to less than 1 percent.
Eskom remains the greatest risk to the economy and a comprehensive and an aligned position is required between the power utility and its stakeholders on how to effect a restructuring within the context of a broader overhaul of the energy sector. The prioritisation of allocating capital to assist Eskom turnaround will assist all economic sectors to yield better results and also trigger South Africa’s exclusion from the Citi World Government Bond Index and projected capital outflows of hundreds of billions of rand.
We need to start speaking the truth that the country is not only impacted by systemic corruption experienced the past years but also the entrenched racial divided economy that has shown to be catastrophic harm pulling the country from reforms.
Inequality in South Africa is the biggest challenge and investors are partly at fault as they didn’t empower the segments and demographics at a calculated balance to address the critical challenge that’s structurally embedded in the South African economy.
Pondering in the two economies, a pragmatic strategist would prefer grace to the nation while, in the future, Grant’s and Investment be allocated to balance the inequality caused by the apartness system, resulted in inequality of economic and labour markets opportunities.
Future implications for the country when we have sub-sovereign rating:
The downgrade is forcing big international bond funds to sell out of South African bonds. When bonds reach sub-investment grade, many bond funds are forced to sell the bonds. The rand will be weaker, that will make our resources be sold on a highly discounted rate and our businesses will be forced to sell systematically lower. As we all know, South Africa is a net importer or is importing more than we are exporting.
The annual inflation rate in South Africa rose to 4.5 percent in January 2020 from 4 percent in the previous month and above market expectations of 4.4 percent. It was the highest inflation rate since June 2019.
South Africa Government Bond Yield from 10Y was 8.83 percent on 2020, February 24,while the bond yield from February 2019 to January 2020 was lower below 8.60 percentage.
Other economic concerns to affect consumers are rand weakening against global currencies that will disrupt international banking and also general fuel increase that will later affect logistics prices and retail prices for food and other consumables.
Before the downgrade the South African Reserve Bank (SARB) indicated that inflation might be heading lower. SARB trimmed its benchmark repo rate by 25 basis points to 6.25 percent during its January meeting, while markets had expected it to be kept steady, citing the country’s persistent economic vulnerability. It was the first rate cut since July, bringing borrowing costs to the lowest level since November 2015.
We need to upload the Resbank for taking a futuristic approach in handling the challenges of the consumers at the moment.
South African investors have enjoyed phenomenal returns over the last two to three decades, as local equity returns outpaced those of most equity markets around the world. As a result, the investors high returns expectations has become well entrenched, with South African investors expecting double-digit growth from the local equity markets over the medium to long term. However, over the last four to five years, South African equity investors have been disappointed.
Potential job losses and loss of selected skills
Local businesses and small, medium and micro-sized enterprises may struggle to grow profits and revenue in the recessionary environment that the downgrade could place South Africa. This may result in job losses, putting many past resilient companies in business rescue and liquidation.
Our analysis predicted that youth unemployment would worsen and that’s the main crisis South African leaders must mitigate from happening. High possibilities for a rising cost of living while corporate profitability falls. Many families will withdraw from sending their family members to colleges and universities as the savings were not there and also living with a cracked disposable income.
The impactful general negative economic outlook could affect South African assets including shares, property, cash and many other asset classes. Local equities have failed to live up to their expectations based on our market analysis. The demand on South African property could drop as well as the earnings from corporates, which in turn will affect share prices.
The Budget Speech 2020 must have capital allocation measures to attend to the economic cracks that our economy has experienced. The economy needs strong lubrication other than just a simple lotion that will not last for 24 hours. We need a budget allocation to economic development and infrastructure development that will reinstate economic activity.
South Africa is a big economy and it will not be sustained by a budget below R1.5 trillion. We need to allocate funds to areas that will boost the economy such as industrial development or manufacturing sector and technology to create jobs. Resilient Small businesses will create jobs when they are protected to grow and be given a space to operate.
South African competition strategy is not bias to small businesses hence startups collapse every 18 months and the economy must provide preferential procurement environment to Small Medium Enterprises. We all needs to embrace shared growth and shared value to realise a united South Africa. Economic development and expansion model has a capacity to impact all segments and demographics of our society and it will automatically cause economic growth.
Miyelani Mkhabela is an economist and director at Antswisa Transaction Advisory Services, contactable at : [email protected] and twitter :@miyelani_hei