The reality of South Africa’s economic quagmire has finally sunk in with the announcement that the country had slipped into a technical recession in the second quarter of this year, adding fuel to populist demands for greater political intervention in the economy.
And while President Ramaphosa eventually called for calm in the wake of the news, the horse, as they say, had already bolted. The rand briefly slid past the R15.30/$ mark on reignited fears that government would not be able to deliver on its fiscal targets or promises of a ‘New Dawn’ at around the same time that the Turkish economy was tanking and Argentina’s financial markets were also convulsing.
Despite the critical need to ignite the South African economy, boost employment and redress deeply entrenched inequality, market jitters make it clear that opportunistic calls for the aggressive redistribution of wealth, short-term solutions and populist policy are not the answer.
In fact, populists needn’t look too far for evidence of the risks inherent in a dysfunctional policy programme: just across the pond, Venezuela’s socialist policies, together with rampant corruption and a hollowing out of state institutions, have brought that country to its knees.
Once one of South America’s richest countries on a per capita basis, and the envy of many developing nations, the International Monetary Fund (IMF) recently revised its prediction for Venezuela’s hyperinflation rate to an annualised rate of 1 000 000% by the end of 2018 from an estimated 13 000% predicted in January this year.
Even with this revision, the IMF may still be underestimating the severity of the situation. By comparison, Venezuelan financial firm Ecoanalítica predicts that the rate of hyperinflation will reach 1 400 000% by the end of this year.
Regardless of the exact rate of consumer price inflation, it is fair to argue that with a rate of inflation that runs into seven figures, the true extent of Venezuela’s financial crisis is anyone’s guess. But while numbers can often hide in a story, some of the figures behind Venezuela’s recent history lay bare the extent of the human tragedy of that country’s poor policy decisions:
- 248 520 The official exchange rate of the Venezuelan bolívar to the US dollar (versus a rate of just 6:1 a mere five years ago)
- 6 670 790 The rate you will actually have to pay via the under-the-counter market if you want one US dollar
- 3 000 000 The number of children at risk of severe malnutrition
- 1 200 000 The number of people who have left Venezuela in the last two years
- 90% The poverty rate in a population of 28.1 million
That this is a man-made disaster, with ready solutions, only deepens the injustice of the situation, especially as Venezuelan President Nicolás Maduro continues to refuse international aid or the delivery of food and medical assistance.
We see a comparable situation with eerie familiarity playing out in Turkey, where President Recep Tayyip Erdoğan’s cronyism and manipulation of the finance ministry, together with a sharp rise in foreign debt and local consumption, has set that country on a steep inflationary course.
While still a long way from Venezuela’s collapse, the situation in Turkey is increasingly stressed. Consumer price inflation in Turkey is currently running at 16%, and is set to hike sharply on the back of a 50% fall in the Turkish lira this year. Notably, in defence of populist policies, Erdogan also refuses to alleviate the deterioration in economic conditions with appropriate policy measures, instead putting politics ahead of economics.
And lest we forget how interconnected the global economy is, we have already seen the effects of these developments on the rand.
South Africa, with its open economy and highly traded currency, caught Turkey’s cold with the rand plunging from R13.10/$ at the end of July to as low as R15.50/$ just two weeks later because of the sharp emerging market sell-off.
And although the blame for our latest GDP results can be partially attributed to emerging market contagion, it is important to recognise that the short-termism and populist policies that have recently destabilised Turkey and Venezuela have also made a few appearances in South African politics.
While many South Africans had hoped to see the end of late-night, shock presidential statements, Ramaphosa announced late on a Tuesday evening in July that the ANC would propose constitutional amendments to enable land expropriation without compensation.
We’ve also seen government agree to above-inflation public sector wage increases, temporarily buffer consumers against rocketing fuel price increases, propose the implementation of National Health Insurance and promise to deliver an economic stimulus package that could cost in the region of R43 billion at a time when the fiscus is under real strain.
The new administration’s investment drive and ambition to reignite South Africa’s economic growth is admirable, but ultimately the lesson from our emerging market peers is clear – policies must be enacted responsibly with the future welfare of the country and its citizens in mind, rather than for short-term popularity or political points.
Tlotliso Phakisi is an investment analyst at Cannon Asset Managers.