Right now, I think that Gill Marcus and her team have some of the toughest jobs out there. The South African economy is in quite a state. Inflation has breached the target, but GDP is shrinking. Strikes are paralysing the key mining sector, government spending is creating a substantial fiscal deficit, slack imports are generating a sizeable current account deficit, and interest rates are rising around the world. In this environment, it’s very hard to know what to do. Does the Reserve Bank raise rates to fight off inflationary pressures and (hopefully) incentivise foreign investors to continue financing our deifict? Does the Reserve Bank keep rates flat in the hopes of jumpstarting growth and offering succor to overwhelmed consumers facing substantial debts? No decision is clearly the right one, and I’m very glad it’s not my call to make. – FDÂ
ALEC HOGG: The latest CPI inflation release is above the six percent target limit, as we just heard, at six-point-six percent and recent GDP data has shown that the economy contracted by zero-point-six percent in the first quarter of 2012. Joining us now to carry on with the theme that we discussed in that chat with Dave Mohr in Cape Town is Nico Els, Head of Fixed Income at Ashburton Investments. Nico, I’m getting to the stage where I’m just trying to find some good news somewhere, because people like you and Dave Mohr – the experts – are telling us that ‘yes, it is complicated but generally speaking, we aren’t doing a great job here in South Africa’. Your latest piece that you put together raises a spectre of a terrible thing called stagflation. Just unpack what that means.
NICO ELS: Thanks, Alec. Yes, stagflation is a very ugly word, especially for a central banker that’s targeting inflation. In a nutshell, it’s exactly what you’ve just mentioned. The inflation limit for us is three to six percent. We’ve just breached that. Today, you heard the six-point-six percent outcome and in the other sense, you have GDP growth contracting at zero-point-six percent for the first quarter, and that’s the predicament for a central banker. Obviously, you would like to increase interest rates in an environment where consumers are spending. It’s demand-driven. Then you have to raise interest rates to contain inflation expectations again and pull down the economy. In the other sense, the economy would like to lower interest rates to support the consumer, but at the expense of getting inflation out of control and spiralling out of control to the upside. Obviously, the Central Bank has been very good at targeting inflation and has built up a good reputation.
ALEC HOGG: It overshot at six-point-six. If you have a target and you overshoot the target, you can’t say you’re doing well. The target’s been breached, and yet we always find excuses.
NICO ELS: There are always excuses. I suppose it’s never the easy road.
ALEC HOGG: Well, at least, don’t say they’re doing well. Say that their targets have been breached. How can they be doing well?
NICO ELS: I think they’ve always consistently done the right measure to try to contain inflation and inflation expectations.
ALEC HOGG: You don’t think that they panicked in the first quarter, by increasing…
NICO ELS: I don’t think so. That’s why I wrote this article, Alec. I think there were many commentators afterwards saying that they panicked and it was a policy error. I don’t believe so. If you look at South Africa in isolation, you can argue that the economy is just weak enough to hike rates. However, and this came very clearly from Gill Marcus in her last statement, saying ‘it’s the global environment that dictates’. Unfortunately, we’ve been caught out with a large current account deficit. Yes, it improved a little bit this morning, but it’s still a big number. We still need R200bn-odd of inflows to fund our current account deficit. Last year, we saw some of those inflows, but if the international arena stops, the whole easy monetary system unwinds. It’s going to become more difficult for South Africa to get those inflows.
ALEC HOGG: Go back a little. How much money does South Africa need to fund the current account deficit?
NICO ELS: The current account deficit is expressed in terms of GDP. Obviously, if you get your GDP going, that number would be lower. However, at the moment, it’s just been announced: for the first quarter of this year, it was minus four-point-five percent of GDP. If you think, we have an economy of about R3.5tn that makes it about R215bn of inflows to fund the current account deficit.
ALEC HOGG: That’s a big number.
NICO ELS: Those are big numbers.
ALEC HOGG: If you consider the way that some people, quite flippantly, say ‘well, we don’t need the rest of the world. We’ll go our own path. We won’t listen to what the rest of the world is suggesting to us’. If we couldn’t get that R200bn to fund the current account deficit, what happens then?
NICO ELS: Well, the reality…the only shock absorber for the lack of those inflows, are a weaker currency. That weaker currency would again spill over into inflation, and there goes inflation expectations again. Hence, the SAB being very aware of this threat, and therefore the rise of the interest rates.
ALEC HOGG: You join the dots for us. The country needs inflows of about R200bn. That means we’d better make sure that we make ourselves worthy of those inflows or able to attract the inflows. Are we doing that at the moment, with things like the platinum strike and the prospective NUMSA strike?
NICO ELS: Certainly not. You can see that, and I think that’s the concern that SAB also has and faces at the moment. The only policy tools she has is hiking interest rates or lowering interest rates. It will be great news if the mining strikes ends eventually, but we’re already in the second half of the year. June is gone, so it’s certainly going to have a very negative impact on our growth forecast for this year. We’ve lowered it to one-and-a-half percent and I think we’ve lowered 2015 to about two-and-a-half percent. That’s the problem, Alec. If we don’t grow, we’re not going to create the jobs and the negative sentiment just remains.
ALEC HOGG: Sometimes, people watching this don’t actually as I say, join the dots, but the way you’ve explained it to us now, is that if we don’t get our act together, we aren’t going to get this money in. We’ll then have to push up interest rates, everyone will pay more on their bonds, and companies will go out of business so there’s a direct knock-on effect, which sometimes you feel that of course, Jill Marcus understands it. Of course, people like Pravin Gordhan understand it, but does the government generally…. Do you get a sense, particularly from last night’s State of the Nation Address that the penny has dropped there?
NICO ELS: If you listened to the State of the Nation Address last night, many things were said that addressed the rating agencies concerns, such as the strikes we’ve had and the electricity constraints that’s holding the economy back. They’re saying the right things. I suppose that at the end of the day, it’s all about implementation and that’s what we’re all waiting for. We’ve been hearing the same stories for quite a while. I think that they realise the urgency that’s required, but they need to get their act together to get the economy growing again.
ALEC HOGG: What I can’t understand Nico, is that you have a Mining Minister – who is a new Mining Minister so this is going to be the most energetic he’s going to be in his whole term. He arrives at the strikes, doesn’t manage to get the two parties together and says ‘well, if they’re not going to sign, I’m out of here’. Surely, that’s government’s responsibility if they do understand the implications of not getting labour relations sorted.
NICO ELS: I think it’s a very difficult one to get labour, business, and government together but as you’ve just pointed out, it’s crucial that we get to that stage and it probably takes a bit from all those parties concerned to move forward.
ALEC HOGG: Dave Mohr was talking about a crisis, not wasting this crisis, and maybe waking up to the realities and smelling the coffee. Do you think he was on the money?
NICO ELS: I think the road ahead is probably difficult. The best route that we’re probably looking at is muddling along, and that’s not a great situation to be in. The unemployment numbers are not getting any better. Crime, as a consequence of that, is probably on the increase, so we desperately need growth\above potential, just to create or sustain some of the jobs we currently have. I don’t say ‘crisis’ is probably the word, but it’s time to act.
ALEC HOGG: Well, I loved what Leon Louw from the Free Market Foundation said. He said that if you take our unemployment figures of 23 percent (officially), we have had the highest unemployment for the longest period of time, of any country in history. Now, if that’s not a crisis, what is?
NICO ELS: Those are shocking stats.
ALEC HOGG: Nico, thank you for unpacking a lot of that for us. Nico Els is Head of Fixed Income at Ashburton Investments.
Remember, you can email us on [email protected]. After the break, we’ll discuss the 2013newafrica.com survey and awards with one of the Internet pioneers in this country – Andy Higgins.
