This afternoon, the governor of the South African Reserve Bank, Lesetja Kganyago, will raise interest rates again and by 50 basis points. Inflation, while cooling in the latest data printout from Statistics South Africa, is still outside the targeted range of 3% to 6% – and as always, the Reserve Bank will act. This is a mandated task for the bank, which ultimately protects the purchasing power of the beleaguered rand.
Higher borrowing costs will not be favorable in the short term for our growth prospects, as they will reduce the purchasing power of people with mortgages, vehicle financing and credit cards. But this is only a small percentage of people in the country.
For the majority, whether rates rise or decline matters very little in the short to medium term. (The only thing that matters to the most vulnerable when it comes to monetary policy is whether a weak rand leads to higher prices of staples such as bread and maize.)
What is more important is that South Africa cannot escape the low growth trap that occurred almost 10 years ago. For all the true hysteria about Eskom and its creaking infrastructure, we live in an economy that has been in decline for a long time.
It’s a harsh reality that I was reminded about in the column written in Financial Times by Tim Harford on the 15 years of the UK’s economic woes since the financial crisis of 2008. Despite record low unemployment in his country, the writer laments that the UK economy has been stagnant for almost 15 years.
The UK is in the situation it is in today and the only reason I can say it is not just because of the delayed effects of the 2008 recession in South Africa and other emerging markets such as Brazil. The crisis-ridden world of investment is seeking the higher growth potential that developing countries provide while watching financial giants such as Lehman Brothers collapse before their eyes.
In practice, what this means is that all cheap money is the result of the main central banks of the world reducing the cost of borrowing to boost the economy coming to the market and economies such as ours. Think about when Wal-Mart, the world’s largest retailer, bought Massmart. It was in the year after the crash of 2008. We were in the money and as a result South Africa was heralded for just how quickly we recovered from the global recession.
But five years later, in May 2013, the main central bank, the US Federal Reserve, raised the prospect that the era of the low dollar was coming to an end. At that time, our world changed as investors lost their taste for the story of South Africa and its rogue president, Jacob Zuma. The same thing happened in Brazil, president Lula, who was his only lover, was immersed in a corruption scandal.
South Africa’s story has never recovered from the change in global sentiment, years of country gripped by more depression, then the Covid pandemic undermined the prospect of a wider economic recovery.
It’s a decade-long story. The scary thing as we head into 2023 is that Eskom appears to be an almost insurmountable asset in the short to medium term to improve growth prospects and, also, improve sentiment about South Africa. This year will be a very important year for all of us.
A decade is a long time to drift. In England 15 years of stale economy led to a generation of decisive bad decisions when choosing to leave the European Union. Let’s hope that future political decisions as we face the energy crisis are nothing short of dangerous.