For many people, the news that South Africa is officially in recession is merely another bad headline after a few weeks of bad headlines – the Gupta emails leaks, indecisiveness of the ANC’s NEC and even the DA’s internal strife. However, this time, there is nothing sensationalist about the crisis we face. It is a tragedy.
Two more pieces of bad news hit South Africa in the past week – the news that the country is now officially in a recession and that Moody’s, the credit rating agency that historically has been most positive about South Africa’s prospects and which gave itself time to re-evaluate the situation post the recent Cabinet reshuffle, decided to downgrade our credit rating by one notch, with a “negative outlook”. The politicians immediately sprang into action, blaming Bell Pottinger’s “white monopoly capital” and the private sector.
For many people, the news is merely another bad headline after a few weeks of bad headlines – the Gupta emails leaks, indecisiveness of the ANC’s NEC and even the DA’s internal strife. However, this time, there is nothing sensationalist about the crisis we face. It is a tragedy.
Let’s start by looking at the concept of a recession. Recession, in a nutshell, means that the economy is not growing, it is shrinking. To classify as a recession, the economy must show it has been shrinking for six months. In South Africa’s case the economy shrunk by 0.3% in the last three months of 2016, and a further 0.7% in the first quarter of 2017.
In a growing economy, companies invest in projects such as new factories, more people are being employed, they spend more on goods and on services, the retail sector thrives, the service industry booms, yet more jobs are created, more investment takes place and so on. It goes without saying that tax revenue is higher, both individual and corporate, allowing government to spend more money on the provision of basic services and on paying off debt. The latter is an important indicator to foreign investors that the country’s budgeting process is under control. This, in turn, gives them confidence to invest in long-term projects, creating more jobs. Government can also intervene in boosting growth by spending money on job-creating projects, such as infrastructure expansion, by cutting taxes to encourage spending and investing, and by making the regulatory environment friendly and secure for business.
The recession is the opposite of all of the above. Companies do not invest, there are fewer jobs, which means people can afford to spend less, tax revenues fall, the government cannot afford to spend money on infrastructure, perversely leading to higher tax rates to boost the coffers. As the country is downgraded, foreign investors demand higher interest rates to lend money to the government, which in turns means more of the already meagre tax revenue is allocated to servicing debt and less to the provision of basic services.
To make this more real, South Africa’s unemployment rate has hit a 16-year high of 27.7%.
In our case, there is also a host of secondary factors which have played a role, such as the fact that our high interest rates have attracted a hoard of foreign speculators, which has kept the rand strong, hurting our exporters. And the fact that China is spending less on its own internal projects and hence buying fewer commodities. But we cannot control global macro-events.
And that is why, very superficially, the ANC is correct. The recession has been caused by lack of corporate investment and job creation. But the true question is why? Why are corporates, and their shareholders, many of whom are foreigners, not investing? Why are jobs not being created? The answer is very simple: lack of confidence in the government’s ability to run the country effectively, in its ability to introduce sound economic and budgetary policies and in its willingness to work with the private sector in the interest of all. Rather, the money is either being hoarded in preparation for tougher times ahead, returned to shareholders, or diverted to projects in countries which offer stability and security. Government itself is so distracted by internal power-plays, and so depleted of people with relevant skills to manage the economy, that it does not know how to, nor can it afford to, play its part.
And here is where the Gupta emails do play a role. They have exposed, in technicolor, the weakness of the current leadership of South Africa. There is no confidence and there is no trust. Neither will return any time soon. The Moody’s downgrade is just a score on a test – it is an “F-” for “Failed”. The minus, or the negative outlook, means that they are not done yet. They are watching to see if “F-” is enough, or whether they should expel us from school altogether. And if that happens, South Africa will be regarded as completely credit-unworthy.
The main implication is that we will be unceremoniously thrown out of the World Government Bond Index, the global classroom for good students. Once that happens, approximately $10-billion in government bonds will be sold immediately, leading to a sharp drop in prices, a rapid increase in interest rates the government has to pay to borrow, a weakness in the rand and a general re-rating of all our investments.
We will all be poorer as we are left to stand on the kerb, with our noses pressed against the school windows, looking in as others prosper. Something about Hans Christian Andersen’s The Little Match-Seller springs to mind. DM
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Sygnia CEO Magda Wierzycka is no stranger to challenging the status quo. The actuary and consumer advocate believes in forcing transparency in the financial services industry, one educated investor at a time. Her outspokenness has earned her a legion of online trolls and is reported to have SA fund managers shaking in their boots. Shes the only female CEO of a fintech company in Africa and loves all things future tech. She tweets from @Magda_Wierzycka.
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