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Monetary policy is driving markets crazy

South Africa can either press the destruct button or it can press the reset button – Rian le Roux, chief economist – OMIG.

SIKI MGABADELI:  Over the past few years the world has become accustomed to quantitative easing programmes and low interest rates. They’ve almost become accepted as normal, but of course they are not. Central banks have been driving interest rates lower and lower, some even into negative territory, in an attempt to boost growth.

Has it worked? Let’s ask Rian le Roux, chief economist at Old Mutual Investment Group. Rian, thanks so much for your time this evening. Has it worked?

RIAN LE ROUX:  Well, it’s a very difficult question. You can’t really answer it, because you don’t know what would have happened if wasn’t for monetary expansion. So very often we hear people say this did not work, but we don’t know the counterfactual. My personal opinion is that if it wasn’t for monetary expansion I think the world would probably have been in a much weaker place.

SIKI MGABADELI:  Maybe let’s just take a few steps back and go to why these particular developed markets, the big ones, decided to go this route in the first place. What was at stake?

RIAN LE ROUX:  Well, coming from the global financial crisis, the first reaction of policymakers …[indistinct] the monetary policy option – in other words you cut interest rates; and when they eventually fell to basically zero, they went for quantitative easing. That is essentially buying paper, being bonds and so on, and then giving the money back to the banks, and hope that the banks would then lend it out and get the economy going.

Of course, what we know is what the banks have done is to place it back with central banks simply because they regarded risk in the economy as too high and didn’t want to lend out to anybody. So the whole process was a little bit short-circuited.

Now of course the other option is to have fiscal policy. But the problem with fiscal policy is it works with long lags. Fiscal policymakers will often tell you it’s not that you have a stream of shovel-ready projects that can just start. Fiscal policy, particularly [regarding] infrastructure, has very long lead times. So monetary policy is your first port of call.

And that is why central banks have managed rates to the extent that they have, and at some point or other the monetary expansion will have to be taken away. I think the lesson the world has learnt over the past couple of years is that when you come out of a financial crisis like we had, it takes a very long time for the world to heal.

And the other problem…at the moment is there is no economic growth either. Yes, the US is okay, but you must remember that in the period from 2000 to 2008/9, before the global financial crisis, China was actually booming. And the linkages of China to the rest of the world are particularly through trade volumes and into emerging markets through commodity prices, which were phenomenally strong. So that coincided with a weaker dollar.

Now you sit with a dollar that’s become stronger, a China that’s slowed and a world that’s looking for a growth model. That can be very problematic. So central banks have basically almost no choice. They’ve got to keep interest rates low and hope that at some point or other the credit mechanism, which is crucially important for the growth of the world, starts to work again. So far it’s not been working, and that’s the problem.

SIKI MGABADELI:  And what do you think may drive the appetite to invest, whether it’s from the private sector side or it’s from the government side?

RIAN LE ROUX:  I think at the end of the day infrastructure of course comes mostly from government. But the private sector is typically far, far bigger than governments. And the problem around the world in many places – and South Africa is a very good case in point – is just an absolute lack of confidence.

So in South Africa fixed investment by companies has been declining for quite some time now. It’s partly because of a lack of demand, and partly because of lack of confidence. So what you’ve seen is South African companies over the last couple of years have actually decided to invest quite a lot of money abroad in direct investment. And that is partly because local economies are growing, capacity is sufficient and then simply concerns over the prospects for the economy and effectively where South Africa is going.

So it should not surprise you in South Africa’s case in particular that companies have decided to invest offshore. What we need in South Africa today, going from the world to South Africa, is we need a confidence boost. And we are seriously lacking confidence.

SIKI MGABADELI:  Are you seeing any hope for improvement in our local economic prospects?

RIAN LE ROUX:  Look, as somebody said today at a conference I attended, in South Africa’s case the big issue at the moment is around politics. It concerns the battle that’s taking place, as we read in the press every day, that we all know about. And somebody said today South Africa is now at a point where it’s got two buttons that it can press. It can either press the destruct button or it can press the reset button. It all depends which one you press as to where this country is going and where the economy is going.

If you press the destruct button, then the rand can go into freefall and the economy can really hit the skids. If we press the reset button, and we start to fix things that are wrong in the economy, I think things can get a lot better. The rating agencies will tell you an economy can get a positive confidence shock, it can get a negative confidence shock. …Go back to 1994 – it sent a massive positive confidence shock and in an economy in a fairly difficult world in the 1990s, South Africa actually did quite well. So it’s not impossible that we can do it.

But we need confidence. And if you ask me what the single biggest crisis in South Africa is today, it’s a lack of confidence.

SIKI MGABADELI:  All right, we’ll leave it there. Thanks to Rian le Roux.

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