File picture: Philimon Bulawayo
JOHANNESBURG - The sources of the current South African economic stalemate are well-known: political infighting, high unemployment, woes of some of the state-owned entities, weak business confidence, weak export orders and credit downgrades.

In the meantime the global economy is expanding at the fastest pace since 2015. Among the Brics countries India and Brazil also missed out on the global upturn, though.

However, the South African economic model was and still is commodity-led growth, and while the surge in commodity prices since 2015 strongly supported the overall economy, the other economic sectors lost out. Rising commodity prices tend to lead to rising external values of the currencies of commodity-based economies resulting in higher export prices of their manufactured goods.

That, in turn, results in lower offshore demand, meaning that the domestic manufacturing sectors lose out on a global upturn.

Export orders tend to increase close to the peak of the global upswing as the external values of the currencies of commodity-based economies weaken as the markets start to price in falling commodity prices. So, our manufacturing sector is almost always behind the curve.

The current relatively strong currency has a profound negative effect on the export of manufactured goods and the gold and platinum industry.


The threat of a significant jump in unemployment is real, especially in the mining industry. From analysing the annual reports of gold mines it is estimated that six gold mines producing 20 or more tons of gold annually are being mined at a loss, given the current gold price of around R17 000 per ounce. The six said mines employ more than 19000 workers.

Furthermore, the platinum group metals mining industry with a labour complement of more than 170000 is in deep trouble as 65percent of the companies are running at a loss.

One thing is certain, a stagnating economy cannot support generous welfare and South Africa has been thrown into turmoil.

The primary objective of the SA Reserve Bank’s monetary policy “is to achieve and maintain price stability in the interest of sustainable and balanced economic development and growth.

"Price stability reduces uncertainty in the economy and, therefore, provides a favourable environment for growth and employment creation.” It is, however, widely accepted that central banks may pursue policies that may not be consistent with some of the primary objectives.

Stimulus to the economy through changes in the monetary policy need to be temporary, though and need to be followed by corrective measures after achieving the goals. The current economic stalemate in South Africa undoubtedly requires extreme measures to pull it from the economic quagmire.

Let us not forget that in the recent past countries such as the US and the Eurozone had to adopt extreme measures to prop up their economies and combat unemployment. The Federal Reserve Bank (US) started quantitative easing (QE) in 2008 and ended the programme in 2014. Since then the US economy grew by 3% per quarter annualised.

The European Central Bank started quantitative easing in 2015 and although they are tapering the easing, it is still ongoing. Since quantitative easing started Eurozone economic growth remained solid.

The Bank of England defines QE as an unconventional form of monetary policy, where a central bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy via lower interest rates and spur economic growth.

The risk of QE is higher inflation. If banks are forced to lend out the money, businesses will increase operations and employ more workers. Higher demand in the economy will result in higher prices paid. The other risk of QE is that if the banks sit on the money instead of lending it out, banks may use the funds to buy back their shares and pay out higher dividends, resulting in the economy not being stimulated as much as the central bank would have liked.

Has the time not arrived for the SA Reserve Bank to aggressively ease monetary policy and/or adopt some type of QE? The low and even negative bond yields and negative inflation adjusted deposit rates in developed economies are exerting upward pressure on emerging market currencies as investors hunt for yield.

The three-month deposit rate in South Africa is 2.4% in real terms. That compares to -0.75% in the US, -2.3% in the UK and -1.8% in the Eurozone. It is imperative that further lay-offs and the closure of mines must be prevented by effectively devaluing the currency.

South Africa can ill-afford to enter a new downswing in the global economy with exceptionally high levels of unemployment and increasing poverty. South Africa has a tool in its armoury left - room for a significant interest rate cut.

Such action by the SA Reserve Bank will be frowned upon by most economists, credit rating agencies will cut the country’s rating even further, the rand will slump against other currencies, and the inflation rate will jump as the prices of imported goods such as oil will rise in terms of rand. But the country’s economy cannot afford to be choked at will by global market players.

Yes, the well-known author and political scientist, RW Johnson, recently summed up what the World Bank and other international bodies want: improved education system, labour laws liberalised, number of civil servants must be reduced and state-owned enterprises addressed. Unfortunately the South African economy is in dire straits and extreme measures are necessary to prop up the economy and combat unemployment. The change in the monetary policy needs to be temporary, though, to be followed by corrective measures after achieving the goals.


Ryk De Klerk was co-founder of PlexCrown Fund Ratings and is currently a consultant for PlexCrown Fund Ratings.