This afternoon, the South African Reserve Bank governor, Lesetja Kganyago, will in all likelihood raise interest rates again and by 50-basis points. Inflation, while cooling in the most recent data prints from Statistics South Africa, is still outside of its targeted range of 3% to 6% — and dutiful as ever, the Reserve Bank will act. It’s the bank’s mandated job, which is ultimately protecting the purchasing power of the beleaguered rand.
Higher borrowing costs won’t be friendly in the short-term to our growth prospects, because it will reduce the purchasing power of those exposed to mortgages, vehicle financing and credit cards. But this is just a tiny percentage of people in the country.
For the majority, whether rates go up or decline matters very little in the short to medium term. (The only thing that matters to the most vulnerable when it comes to matters of monetary policy is whether a weak rand is feeding into higher price of staples such as bread and maize meal.)
What matters more is that South Africa can’t get out of a low growth trap that set in almost 10 years ago. In all our rightful hysteria about Eskom and creaking infrastructure, we live in an economy that’s been drifting for a generation.
It’s a harsh reality I was reminded about in a column written in the Financial Times by Tim Harford on the 15 years of the United Kingdom’s economic woe since the 2008 financial crisis. Despite record low unemployment in his country, the writer laments the fact that the UK economy has been barely able to gain speed for 15 years.
The UK is in as much of a rut as we are and the only reason I’d say ours isn’t as long as theirs is the delayed effect of the 2008 recession on South Africa and other emerging markets such as Brazil. An investment world spooked by the crisis sought the higher growth potential afforded by the developing world when they saw financial giants such as Lehman Brothers collapse before their eyes.
In practice, what that meant was that all the cheap money as a result of the world’s leading central bankers slashing borrowing costs to boost their economies came to markets and economies such as ours. Think back to when Wal-Mart, the world’s biggest retailer, bought Massmart. It was in the years just after that 2008 crash. We were in the money and as a result South Africa was heralded for just how fast we recovered from that global recession.
But five years later, in May 2013, the leading central bank, the US Federal Reserve, raised the prospect that the era of cheap dollars was coming to an end. At that point, our world changed as investors lost a taste for the South African story and its delinquent president, Jacob Zuma. The same happened in Brazil, the presidency Lula, a one-time darling, was mired in a corruption scandal.
The South African story has never recovered from that change in global sentiment, the years of state capture depressing it further, and then the Covid pandemic bludgeoned our prospects of an economic recovery that much further.
It’s a decade-long story. What is scary as we start 2023 is that Eskom looks to become something almost insurmountable in the short-to-medium term to boost our growth prospects and, in turn, improve sentiment about South African. This year is going to prove to be a very significant year for us all.
A decade is a long time of drift. The UK’s 15 years of a stale economy led to a generation defining bad decisions in choosing to leave the European Union. We best hope that our future political decisions as we deal with an energy crisis are nowhere near as detrimental.