Moody’s estimates that SA’s sovereign debt will stabilise at 56% of GDP before a recovery takes hold. According to the World Bank, South African consumers are the “biggest borrowers”globally, with 37,7% of the 19.9-million credit-active consumers having impaired credit records. Let that sink in – the state owes half our national annual productive capacity, and a third of consumers owe more than they can afford to repay.
If one takes the perspective of Ray Dalio’s “debt cycle”, the American billionaire hedge fund manager and founder of investment firm Bridgewater Associates, the South African state and population is at the very late stage of the debt cycle. This is a stage when what he calls the “early phase” of the cycle has passed through the phase he calls the “bubble”, passed the crescendo at the “top” of the cycle and shifts into “depression” – either inflationary or deflationary. It depends on the trade balance, import orientation and the pace of investment on the back of declining confidence. This stage requires an inevitable deleveraging process that dampens growth.
In most countries this would spell trouble for the market and overall health of the economy, but South Africa is a special case.
South Africa has very recently emerged from an era of Zumagate grand corruption, crony deployment and state capture. During this lost decade of social grant euphoria and decline in business confidence, the private sector has opted to either invest offshore or bank their cash, while the likes of the mining sector looked on in horror as the politicization of regulation and labour crippled their otherwise labour absorptive sector. This was bad for jobs, bad for South Africa’s long-term prospects, and bad for business. The Zumagate era ended in the recent technical recession.
With the announcement of President Cyril Ramaphoza’s stimulus package today, the sun is beginning to rise over the horizon of national confidence. The President has, using the limited fiscal room available to manoeuvre, offered us a new deal in his new dawn. However, the constraint on getting the bull-run we need, is our debt burden. As the President said, “our government has limited fiscal space to increase spending and borrowing”. So the money, if the stimulus is to be meaningful, will have to come from the private sector – as I think it should.
Why? Because in addition to our sovereign and consumer debt, the wealthy among us today sit with a massive incalculable historical and social debt. This is the unfortunate and unflinching reality of the post-apartheid legacy system and its socio-economic consequences. It lies at the root of the land debate, and at the heart of resentment among the systemically excluded youth. The wealth that has been amassed in South Africa over decades was not created in a vacuum, but in a tornado of extraction, exploitation and exclusion – and morally, South Africa is now extremely late into the debt cycle.
Unless we want a revolutionary structural adjustment in socio-political terms, which is increasingly likely if the economy peters along and job losses mount into the 2019 and 2023 elections, we need to grow the pie significantly.
South Africa needs a step change in inclusive economic growth, and the president’s stimulus package is a good starting point and a blueprint that can work. It will eventually need to be complemented by entrepreneurship, large-scale skills development and a wholesale economic restructure, but it is the right starting point.
Accelerate infrastructure investment in roads, industrial and social infrastructure, fix mining, enhance the competitiveness factors in manufacturing, clean up municipalities and enhance health and education. This is the right starting point and will boost confidence. Agriculture will be tricky against the backdrop of land expropriation, but it can and must be done given the labour absorptive capacity inherent in the sector.
What is lacking from the President’s plan, what holds us back from the step change required, is the ability of the private sector to see the bigger picture and make the long-term commitment to finding creative ways to settle the historical social and moral debt we owe. Could we lose our pensions and savings in the process of partnering with a partially captured and poorly capacitated state? Quite possibly. Speaking as a scenario planner: we will lose the kitchen sink if we don’t partner with this administration; it’s just a matter of time. DM