Growth is all that matters to investors

SA economists are grappling with two imponderables: why the rand has continued to weaken despite the slight easing of USSA diplomatic tensions; and whether the Reserve Bank erred in hiking the repo rate last month, given that the rand weakened even more in response.

The most plausible explanation for the rand’s continued extreme weakness is that the shock of the US allegations that SA sold arms to Russia caused the markets to take a harder, more dispassionate look at all the background risks that have been bubbling under the surface of this economy.

For a long time the current administration has been given wide latitude by investors to deliver structural reforms, especially in restructuring Eskom. But with load-shedding intensifying, Transnet in disarray, SA’s growth case collapsing — and the government kowtowing to Russia — it is no longer possible to relegate those worst-case scenarios to the fringes. An exchange rate of more than R19/$ means SA has been judged and found severely wanting.

Enter the Reserve Bank. Last month, faced with persistent target breaches and a worsening inflation trajectory, it hiked the repo rate by 50 basis points (bps) in an attempt to shore up the rand and tame inflation expectations. Except the move caused the rand to weaken even further, presumably because the hike also dampened the outlook for consumer spending, economic growth and, ultimately, fiscal revenue.

But if the Bank believes it acted appropriately in terms of its mandate and reaction function and remains wedded to this approach (as I’m sure it does), then another hike must surely be on the cards at the July meeting. If the rand remains above R19/$ and the US Federal Reserve hikes again, the Bank could even hit the economy with another 50bp snotklap.

The implications for growth are dire. On Tuesday Stats SA will release the first-quarter GDP figure. Though parts of the economy have shown remarkable resilience, it is likely to be close to zero. If the economy contracted outright it will mean that SA is in a technical recession, given that growth was -1.3% quarter on quarter in the previous period.

If so, the consensus growth forecast could shift from a tiny positive growth rate to an outright negative one for the full 2023. The rand is likely to tank anew. With tax revenues likely to fall far short of projections, the fiscal implications are becoming alarming.

In February the Treasury expected growth to be close to 1% this year and believed the debt ratio would peak at 73.6% of GDP by 2025/26. This was always too optimistic, not just because it woefully underestimated the intensity of load-shedding but because it also ignored numerous expenditure pressures. As feared, the public sector wage settlement was larger than expected and we know that weak state-owned enterprises will require further fiscal support and that borrowing costs will be higher than projected this year.

This means public debt will increase steadily beyond the Treasury’s expectations — even more so if the R350/month social relief of distress (SRD) grant is made permanent and the government’s commitment to fiscal consolidation palls as the 2024 election approaches.

All of these factors taken together explain why the rand has remained above R19/$ and bond yields are back to their Covid-19 peaks of 2020. Ratings agencies and foreign investors have not given up on SA, but need to see concrete signs that it is getting on top of its energy, logistics and other growth constraints, while maintaining fiscal and monetary policy conservatism and more prudent foreign policy.

We can count on the Treasury and Bank to hold the line as best they can, but they are tightly constrained when it comes to supporting growth — and growth is the only way out of the country’s deep malaise. You’d think the rest of government would have realised that by now. But its lack of urgency and leadership remains our biggest handicap.