Dr Roelof Botha, adjunct faculty member of GIBS, wrote this article in response to Magnus Heystek’s ‘Your future in the charts’, available to read here.
The art of informative economic commentary is to provide a balanced view and to refrain from the use of unsubstantiated sweeping statements – principles that are taught at most reputable economics faculties.
Most individuals have a view of how society should be arranged, essentially from the perspective of morality, whereas economics comprises an encompassing set of tools that enables people to understand how society really works.
In order to be accurate, the science of measurement of the host of information that collectively represents an economy requires thorough analysis of each and every underlying factor that influences the key objectives that policy-makers strive for.
The latter can be gleaned into one word: stability – whether pertaining to economic growth, employment, the balance of payments, prices or the public finances.
A recent rather cynical opinion piece published by MoneyWeb was seriously lacking in the requirements of useful data. The author predicts a looming so-called “financial meltdown” for South Africa, premised on only three observations that are largely irrelevant and inaccurate, namely the public debt/GDP ratio, the JSE all share index and house prices.
The purpose of this riposte is to set the record straight, whilst not denying the existence of daunting challenges in both the socio-political and economic milieus – many of which actually represent interesting opportunities for advancing the welfare of our embryonic democracy.
Although South Africa’s public debt/GDP ratio has certainly increased since 2008, it has followed a near-universal trend (induced by the 2008/09 recession) and is still low compared to most key trading partners.
South Africa also enjoys fundamental fiscal stability in terms of a relatively low budget deficit/GDP ratio and the systematic lowering of government’s borrowing requirement as a percentage of gross public debt – a fact implicitly acknowledged by the country’s inclusion in the benchmark Citigroup World Government Bond Index (including only four emerging markets).
Regarding the performance of the JSE over the past year, it is naïve to equate equity prices to general economic conditions – especially in a country where key sectors of the economy do not rely on the secondary capital market to finance capital formation.
Furthermore, it is alarming to note the article’s skewed perspective of the performance of the JSE. Since April 2003 the all share index has gained 15.5% per annum, on average – a stellar return compared to most of the world’s bourses.
South Africa enjoys the following World Economic Forum competitiveness rankings (out of 138 countries):
- Financing through local equity market – number one
- Soundness of banks – number two
- Regulation of securities exchanges – number three
Against this background and also considering the consistent and large inflows on the financial account of the balance of payments over the past two decades, it is quite absurd to suggest the prospect of a “financial meltdown”.
Turning to the third point, it is true that the domestic property market has not performed well, on average, since the recession of 2008/09, but it should be borne in mind that this market exhibits much longer price cycles than most other constituent components of any business cycle or the economy in general. It is therefore misleading to selectively refer to time-series data sets that do not cover a complete property price cycle.
The sideways movement since the beginning of 2008 of a major bank’s real house price index (for all sizes of houses) masks the fact that the average house price, in real terms, more than doubled between April 2002 and August 2007, recording an average annual real rate of increase over this period of 15.4% – quite impressive by any standards.
Viewed over the full period between 2002 and October 2016, the average annual real rate of increase in house prices amounted to 4.8% – still a decent rate of return compared to real money market rates.
The thinly-veiled accusation of fiscal mismanagement aimed at Finance Minister Pravin Gordhan is arguably the most disturbing aspect of the general lack of substance and objectivity in the article.
Mr Gordhan took over from Mr Trevor Manuel at a time when the world economy was entering a period of unprecedented economic hardship – not experienced since the Great Depression.
Not only did a swathe of countries (including South Africa) enter a serious recession, but China’s growth declined to a structurally lower level. The so-called commodity “super-cycle” also ended soon afterwards, with most metal & mineral prices spiralling downward for more than five years.
Ultimately, this contributed to substantially lower growth in most commodity- exporting countries, with the likes of Brazil, Russia and Nigeria recently even being drawn into economic recession – a fate that South Africa has managed to escape.
Higher economic growth is being forecast for South Africa in 2017 by both National Treasury and the World Bank, which should ease fiscal pressures and soon abolish the debt downgrade debate to the archives.
Sound management of the country’s public finances by Mr Pravin Gordhan and his successor, Mr Nhlanhla Nene in the most difficult circumstances in decades, has allowed South Africa to stabilise its budget deficit/GDP ratio at just above the 3%- level, with sound prospects of a further lowering in the medium term.
Mr Gordhan is widely known for his commitment to upholding sound corporate governance principles; establishing an incentive scheme for youth employment; and combating corruption via pragmatic new policies, including public sector procurement reform.
To question his integrity and management skills at this juncture of the country’s history is disingenuous indeed.