Madeleine Wackernagel : Taking Stock
Everyone, taking their cue from the governor of the Reserve Bank, is referring to 1997 as the year of consolidation: the rand has stabilised, domestic demand is cooling down, and inflation is finally below double-digits. Best news of all, there is room for an interest-rate cut. Grounds for optimism, it would appear.
But looking at the bigger picture, the local scenario is less rosy.
The international economy is booming; the United States and Britain, in particular, have never had it so good, or at least not for a while. Inflation is very low, growth is good – and expected to remain so. The International Monetary Fund predicts rates of about 4% and more this year and next.
Granted the picture in continental Europe is not quite as encouraging, with severe unemployment persisting while Budget deficits remain stubbornly high. And then there are looming problems in the Asian countries.
For a developing economy, South Africa is worryingly out of step. We should be rollicking along at growth rates of at least 3,5%; instead, we could be looking at 2% this year and 2,3% next, once the effects of El Nio take hold a significant scaling-down of previous estimates.
The governments growth, employment and redistribution (Gear) strategy lays out fairly stringent parameters for the key indicators up to the year 2000. It could not have foreseen the potentially severe effects of the Pacific weather phenomenon on agricultural output and related sectors; last time it struck, 20 000 jobs were lost.
But even without El Nio, Gears projections look way out of line now, 15 months into the new policy.
Take the real interest rate, estimated at 5% for this year. It is nearer 10% to 12%. Or gross domestic product growth 2,9% versus a more realistic expectation of 2%. On inflation, the numbers are more accurate: 9,7% for this year, but the Budget deficit target of 4,0% looks less certain.
Reserve Bank governor Chris Stals seems immune to pleas from various business quarters to cut rates, sooner rather than later, and the government, presumably, risks its reputation by even suggesting it. So, Stals continues to put the squeeze on the economy when we can least afford it. In every speech, including one this week in Kuala Lumpur, he reiterates his tough monetary stand. Rates will not fall until hes happy that money-supply growth and private credit extension are under control.
What he fails to take into consideration is the real economy. Anecdotal evidence points not just to a slowdown but the risk of strangling any potential growth left in the economy. This weeks business confidence index, compiled by the South African Chamber of Business, showed yet another dip of 0,5 percentage points in September after a 0,3 percentage point fall in August. High interest rates figured large as a reason for the continuing gloom.
Signs are he will wait until the third- quarter data are released before making a move and then the best we can hope for is a one-percentage point drop. But the damage has already been done.
High real rates encourage investment in financial capital, rather than real capital. The stronger rand is testimony to this trend, which in turn is inhibiting our export competitiveness. And as long as individuals are stuck in their own private debt trap, consumers cannot help the economy out of the quagmire.
The continuing growth in credit extension is a bit of a mystery; the best explanation the bank can come up with is a switch from foreign to local finance in response to more expensive forward cover. But a large part of the problem is local government borrowing, so part of the solution would be tighter controls on public-sector spending.
Instead, the crunch continues, at the risk of long-term structural damage to the economy, not to mention denting investor confidence.
And as long as it does, jobs will not be created, threatening the countrys economic and social stability. Isnt it time somebody stepped down from his ivory tower?