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Talk of ‘financial meltdown’ quite absurd

Response to Magnus Heystek’s article: ‘Your future in the charts’.

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.

screen-shot-2016-11-08-at-3-46-16-pm
 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).

 screen-shot-2016-11-08-at-3-46-29-pm

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.

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COMMENTS   37

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Thank you for this, which I found to be well-written and informative. Context is everything, although this piece may not go down well with the militant wing of the Moany-Web Irregulars because positive and rational thoughts really do: that is not how internet trolling or click-baiting works.
As for charts: I expect Magnus will be driving his new car using only his rear-view mirror, because the past tells us everything we need to know about the future. That is why there are never any surprises, ever.
Regarding your comments on Mr Gordhan and Mr Nene: all true, but remember that Des put in a weekend shift too.

Keep believing Phill. Christmas is fast approaching maybe the guy in the red suit will bring some financial cheer as well.
Hope is never a good business model.

Your steady the ship pep talk left out the most important bit. You know, the portion that tells J6P that the entire financial system is nothing more than make believe digits on hard drives and that fractional reserve banking is fiat so-called money. In short it’s all fraud backed up by state violence.
This financial Titanic globally hit the iceberg in 2007/8 and since then we have been living in a world of financial delusion patched together by Boring Ben and grandma Yellen printing counterfeit money known as QE. All the while praying and delaying their day of reckoning.
Enjoy it now as these are truly the good ol’ days.

Truth but most of the global social system is predicated on this and has been since the gold standard (not to say its right but rather, that any change means society functioning [as we know it] will be demolished)

– honest question: what’s the better alternative? Gold/Bitcoin/socialism or universal income/other?

I would suggest a (truly) public Fed is a great start

Since you are sincere in asking this question, this is my sincere take on it. According to Prof. Huerta De Soto – “Money, Bank Credit and Economic Cycles”, the only solution to the problem of perpetual credit expansion, and the resulting economic collapse and depression, is honest money.
He describes the modern currencies as a fraud, for a bank deposit that should be kept in safe-keeping by the bank, is fraudulently lent out at an amount equal to 10 times the amount deposited. This is the fractional-reserve banking system. Now this system is amazing as it creates unbelievable amounts of credit out of thin air.

Because of the instability of the fractional-reserve banking system, the Central Bank is needed to constantly bail out bankrupt banks with public money. To bail out private banks, is in fact the only reason for the existence of Central Banks.

As long as fractional-reserve banking is allowed, a gold standard will make no difference to the cycles of credit inflation and economic meltdown. The fractional-reserve banking system is the root of the problem.

Now what Prof. De Soto suggests as a solution is a gold standard without fractional-reserve banking and without Central Banks. This is what he describes as honest money.

The oldest currency in existence is only slightly more than 300 years old. All those fiat currencies before it, evaporated though hyper-inflation. Now, what makes us so special to believe that after thousands of years of disappearing paper currencies, it won’t happen this time around? Actually the purchasing power of all modern currencies is disappearing before our very eyes. With our consent of course, for cheap credit is what the public want.

And all the SOE’s—SAA,SABC,SA POST OFFICE,ESKOM and all the others which fall directly under Gordhan–are just doing swimmingly well…..
Pull the other one.

What about that bid domino called JAPAN???

It has UNSUSTAINABLE debt.

Don’t spoil our fun with the facts now! We love to talk negatively about SA and local politics but the fact that we are still living here is the ultimate vote of confidence.
Everybody is anxious about crime, corruption, state capture, irresponsible EFF policy and student protests, but never in the history of this country did we have a more stable democracy than right now.

Polls show that more than 80% of people in SA are not racist and want to live peacefully together, respecting one another.

The point is, when we include all of the population, things have never been better in SA. What is the use of emigrating to protect one’s assets from politicians, when the foreign bank holding one’s savings can suffer a “bail-in”, leading to loss of capital?
With international banks still struggling with liquidity issues the chance of this happening is as high as you being burgled in SA.

Negative people who emigrate are simply negative in a new country I suppose.

1. I agree that the public debt/GDP ratios in other countries are higher, but don’t forget they pay far lower interest on it than SA. I think the percentage of the budget for servicing the debt is much more important. Germany, UK, USA pay 2% or less on government bonds while SA 8-10%.
2. SA is in high places in World Economic Forum competitiveness rankings in the field he mentions, but conveniently forgets the ranking in labour relations and education.
3. Some commenters here complain about people criticizing SA from outside. AFAIK Mr Botha lives in the US and made his money there not in SA. Obviously even he thinks that outside SA one has better opportunities.

You are thinking of Pik’s grandson? He is not a Doctor, he is an Actuary (by training)

You are right. It looks that he is a different Roelof. But my first two points are still valid.

I always read Magnus articles with a bit of apprehension. He falls in the same bracket as Julius Malema, preying on people’s vulnerabilities especially during economic uncertainty. Remember when he said the USD/ZAR would be R18 by end of 2015? But I like his articles they always provide one with a gauge of what the worst looks like

Be careful what you say about Magnus on this site. He pays a lot to be able say what he wants, and we don’t. I’m very surprised they allowed this article

After 5 years of growth numbers surprising to the downside, our growth expectations are near zero. If we get rainfall, the agricultural sector alone will turn in about 1% GDP growth and likely another 1% off inflation since there is really not much around except for food and electricity.

Some industries, are currently experiencing serious negative year on year declines, such as auto sales. But this is part of a structural re balancing. There is over performance captured in the base for the year/year.

The fact that we are seeing zero growth while we have major declines captured in the numbers of say auto, agri and construction and mining over a number of years means that next year, with the environment a bit more balanced we could finally get surprises to the upside.

I also think we are missing major improvements in the uncounted economy, look at Cashbuild and Build It, their customers are people entering the world of capital formation for the first time ever because they are just getting their noses above water for the first time ever.

“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.”

Aren’t we comparing apples with pears here? The underlying assets of the other economies above and below SA on the list have vastly more sophisticated infrastructure and intellectual capital. This is like comparing the English Premier League football team with the SA Premier League.

“Since April 2003 the all share index has gained 15.5% per annum, on average – ” … but it’s down 5% on one year to date.

“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.” Which is less than inflation over the period so you’ve actually lost money …

Of course our economy has struggled in the general mess of the world economy in the last 5 years but what’s at issue here is the ability of the ANC appointed cadres to build the economy at the same pace as the others in the table when the global economy finally does turn the corner and in this I’m with Magnus.

Real rate of interest implies that inflation has been taken into account. Don’t confuse real rate with nominal rate

Mmm…

Please bear in mind that the inflation statistics are WAY higher than whats reported

Taking this into account, then Beachcomber is spot on wrt property

If you still buying any statistics as released by Govt etc, then you might want to look up the word ‘gullible’

Let’s agree to disagree.
Let’s also agree to revisit this topic one year from now, on 9/11/17, on which day we both report back to base.
And then let MW readers decide…..

Magnus – please diarise so that we get the evaluation

Magnus, even if things turn out for the better [ which obv we all hope ], what is appreciated is your ability to offer a sobering view of the potential downsides and the current realistic status quo of NOW !

Not like the other economists who seem to live with their heads in the ground.

What Magnus, and some of the other commenters, is conveniently doing, is setting up a Botha-strawman, and then attacking it with gutso.

Dr. Botha responded to the reasons/charts given by Magnus.

If I were to have called somebody out in 1936 who complained that Hitler was evil personified, because he had an evil-looking mustache, that doesn’t mean I thought he was due for sainthood ahead of Mother Theresa…

We know that there are statistics and lies and then there is reality. I think both articles miss the essential point which should be about recovery from a depressed global economic situation and sustainable growth in the long-term.

The 3 WEF competitiveness ranking elements mentioned in this article are excellent, but they are not prerequisites of economic recovery and growth (yes, they will serve to assist). There are too many more meaningful rankings that are not considered that link directly to economic growth, plus there are many other issues that will continue to handicap whatever good work is being done is SA by some very good people. Some of the more critical being:

– Unemployment, at an official versus expanded set of figures of 26.7% and 36.3% – one of the worst in the world.
– Gini coefficient, consistently one of the worst on the world.
– Education, ranked 144/144 on maths and science and a system dominated by unions protecting underqualified teachers, etc.
– Entrepreneurship, very low levels from a global perspective.
– Xenophobia, regular/recurring events.
– Service delivery, very little needs to be said here except the unrest as a result has escalated beyond control.
– State of Capture, this is a danger at national, provincial and municipal level.

These are the things that need attention if a country is to make any significant economic headway. And, sadly, these are the areas where government has consistently failed to deliver. Unless they are addressed in a meaningful manner we will be on a slippery slide towards a financial meltdown with a subsequent loss of any current competitive advantages we currently have, and that includes the goodwill that exists in the broader public.

Thanks for this Dr Botha. It scares me what Magnus is allowed to say on this site.

Everyone appreciates an honest opinion even if you disagree. If everyone is singing the same tune there could be no debate like we have here.

What exactly scares you? The article doesn’t state much worse than what has been written by many other analysts and economists for years now.
Have you perhaps read what RW Johnson says in his book and articles?Just asking?

Why ?

It shouldnt scare you if there wasnt any truth in it ?

Mmm…

Economists and investment advisors are generally as good as the circumstances are in their daily cup of tea. They peer into the leaves and then forecast what they see and write reams about their unique visions. Regrettably the world has moved on so in the 1900 to 1970 economists were looking at real tea leaves, today tea is in little sachets so the leaves that the economists are reading today discounts those leaves that didn’t get out of the sachet – simply put they are looking at an incomplete picture which has no resemblance to reality, and accounts for why they are so wide of the mark in many cases

Yup

and most of them, like Dr Botha here, never call it for what it is.

One just has to look at whats going around, instead of these ivory tower occupants who live in la la land.

Mr. Gordhan is a communist with integrity. Mr. Heystek did not question his integrity or management skills. Whether he can transform South Africa to a growing capitalistic centered country has not been proven and remains to be seen.

Definately an article to bookmark. I love it when economists and analysts actually takes a position on something. Too many times these analysts/economists forecasts something just to be forgotten afer a year. Yes our borrowing requirements as % of debt declines, but so what? If your debt increase and your borrowing requirements increase to a lesser degree it will decrease. To take on a bet on financial meltdown we should define it clearly which is not the case here.A more detailed bet would have been exciting. Out of experience I have realized that forecasts for longer than 6 months does not mean anaything. I wouldn’t hold my breath on WB/NT forecasts.

Dr Botha is coating the unbearable truth in sugar again

Just like all the other ivory tower economists who keep generating BS positive forecasts [ inflation is always WAY higher than official statistics……..growth predictions are always way lower than whats fed us by mainstream media]

At least Magnus calls it for what it is.

As Magnus says, lets check in here a year from now.

The only way I can see any hope is if Zuma gets booted…the rand stabilises etc etc

But who they gonna replace him with ?

The cons far outweigh the pros for now unfortunately.

And only Magnus has the guts to call it for what it is right now.

I’d love to see a comparison, across countries, of annual cost of servicing government debt versus total government spend (or GDP). Magnus?

Talk the talk, Roelof. You are living in the same fantasy land as the Clinton fans. The tragedy is that you know very well that our financial system is rigged and corrupt, from interest rates, stock markets prices, gold price and currencies. Markets are what our financial and political mandarins want it to be.
But, you are eating from that through and like the Clinton fans, part of the cult. And I can already hear you saying: “Nobody could have foreseen this. Really, nobody”.

Thanks for the Dr. Botha.

Like I said before, Magnus is not qualified or equipped to comment on such matters.

Having only a BA(Hons) Magnus is only qualified to bring me tea to my office and not comment on economic affairs.

And in retrospect it looks like reality spat in your tea while you weren’t looking.

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