In his recent contribution, Magnus Heystek rightly points out that SA has a serious debt problem. His analysis – essentially, that the government has been spending more than it takes in, that many state-owned enterprises are over-indebted and in a bad way, and that economic growth has underperformed for several years – is largely uncontroversial. Tito Mboweni said as much in his medium-term budget speech.
The best path forward is also fairly clear. We know more or less what the IMF would demand in the event of a bailout, which is broadly in line with what Mboweni and president Cyril Ramaphosa have proposed. The big question mark, as Heystek correctly points out, is whether there is sufficient political will within the ANC to make the necessary changes before a full-blown crisis forces the country’s hand.
To me, however, what is missing in Heystek’s analysis is a global perspective. Because SA is not the only country that has found its way into unsustainable debt and it’s also not the only country facing a set of very tough choices.
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To many global economists, the single biggest issue we face right now is global indebtedness. In country after country, governments, companies, cities, and individuals have made promises about future repayments or commitments that they don’t seem able to keep. As a small sampling of what I mean:
- Corporate debt in China has risen to staggering highs. China’s total debt is now equal to 300% of its GDP. The debt bubble grew during a period when China’s growth rate was close to double digits. That rate is declining faster than expected, thanks to the trade war, and the underlying credit quality of Chinese borrowers is unclear.
- US public pensions, which cover police officers, teachers and so on, have promised trillions of dollars in benefits that they are unable to finance. At the state level, a rapidly growing proportion of tax revenue is earmarked to cover pension shortfalls, robbing the government of the ability to invest in productive projects like new infrastructure of better education for children.
- Moody’s and Fitch are threatening to downgrade the UK’s credit rating because the country has been running budget deficits for years and is now promising massive spending increases.
- Globally, corporate debt has hit record levels at the same time as average corporate credit ratings have declined. The IMF has warned that up to 40% of corporate debt in major economies like the US, China, Japan, Germany, and the UK, is almost certain to default if the global economy enters a recession.
- Turkey and Argentina have both experienced debt-related currency crises in the last year.
The world, in short, has a debt problem – SA included. And the cause is no mystery.
When the global financial crisis hit over a decade ago, it struck at the very heart of the capitalist system: credit. Liquidity dried up. Liquidity means the ability to buy and sell securities, to source cash as needed for investment. In short, liquidity is what greases the economic gears and the financial crisis all but evaporated it.
A response was needed, or the whole machine would have seized up. Governments chose to do two things. First, they chose to bail out the financial system by injecting trillions of taxpayer dollars into it. Second, they chose to “turn on the liquidity taps” by having central banks print a lot of money.
In a sense, this approach worked. Liquidity returned and the global economic system did not perish. But it didn’t work perfectly. Liquidity is important because the idea is that when capital is available, it will be invested in things that are economically productive, like new factories or better airports or new universities that churn out better-educated workers. But that’s not quite what happened.
In 2009, the world was in recession. Millions of people lost their jobs and their homes. Opportunity was thin on the ground, so business investment was slow and cautious. Many businesses hesitated to invest and began to build up cash piles. Some of them, encouraged by ample liquidity, took out loans at low interest rates. But instead of investing in new productive capacity, many engaged in share buybacks or M&A activity that inflated asset prices without really touching the real economy. Economic growth returned, but it was slow and patchy. Yet asset prices surged – especially US stock prices and private equity valuations – as liquidity sloshed into the available channels.
Because central bank rates were low and capital was plentiful, there was a lot of money looking for places to earn returns. Emerging market assets, especially emerging market government and corporate debt, enjoyed significant inflows. This pushed down interest rates for these borrowers but didn’t do much to discipline how they spent the money they borrowed.
The economy took on a new shape. Owners of assets like stocks or private investments saw their portfolios grow rapidly. Highly educated people who could find jobs in the financial sectors or in big tech made out like bandits. But wages for everyone else declined. In most places, this was covered up by rising house prices – another symptom of easy liquidity. But real wages – real productivity – remained depressed.
Which brings us to today. Almost everyone on earth has borrowed a lot – governments, corporates, individuals. Even so, the world is awash in so-called “dry powder” – companies and investment funds (especially private equity funds) are sitting on enormous cash piles that they have nowhere to invest (because the real economy isn’t really growing more than 1-2% a year in most places). This abundance of liquidity is keeping rates low – central banks are still printing money. But printing money when there’s no productive place for it to go just leads to more asset price inflation, not real value creation.
At some point, this bubble is going to burst. It may be a crisis in China. It may be a rash of corporate bond defaults in the US or Europe. Who knows? But when it does, the crisis will be even more serious than 2007s and central banks won’t be able to do much about it. There’s a limit to what liquidity alone can do without economic reform, without economic opportunity.
South Africa is a small boat being tossed around by these global waters. The country has been mismanaged. There’s no doubt about that. But its ineptitude has been enabled by excess global liquidity that has kept borrowing artificially cheap, and SA is just one of many countries facing the harsh reality of too much debt. And like them all, we face some very difficult choices in a difficult environment.
