The David Gleason Column
Is South Africa about to step out from underneath its long-running recession? Stockbroker SG Frankel Pollak chief economist and strategist Nico Czypionka believes the domestic economy has bottomed, and privately says he considers it probably touched its lowest ebb in February.
Well, that’s certainly something, but it won’t do to get too excited too quickly. Czypionka’s prediction is for a shallow V- shaped recovery, hesitant at first, leading to an improvement over the whole of this year of an almost imperceptible 0,4%.
If this is negligible, at least it’s a lot better than the zero growth in 1998.
But he also predicts a steady increase in quarter-on-quarter growth to deliver a gross domestic product (GDP) nearly 3% better for the year 2000.
Over the next fortnight Czypionka will tell South African institutions that the bottom line in charting the economy’s short-term course will be international perceptions of the country’s risk profile.
Those perceptions are, in turn, affected by a variety of factors, high on the list of which he puts the country’s continuing massive real interest rates.
I have personally often complained that the inordinately long period over which real interest rates have been held at punishing levels has impacted on the misery of many South Africans and lead to a substantial social dislocation.
The Reserve Bank will argue, I suppose, that this is the price which had to be paid if inflation was to be defeated.
Unfortunately that was true, and in the process, high interest rates came to be endemic.
Now Czypionka argues that a steady lowering of interest rates will actually have a reverse impact on foreign perceptions of our country’s risk.
His view is that prime interest rates will fall from a peak last year of 25,5% to about 14% next year.
Inevitably, therefore, foreign investors will be confronted with decisions about accepting lower interest rates on the one hand, while anticipating much improved company performances on the other, both impacted by an assessment of the extent to which the rand will hold its value.
Falling interest rates will also be expected to fuel long overdue and much- needed private sector investment in fixed capital projects.
A feature of high interest rates is that they severely depress the domestic ability to save.
In South Africa’s case, because we are generally a nation which spends above its capacity, savings have never been very high, but last year they fell to 14,2% of GDP.
This compares very unfavourably with 1985’s rate of just less than 25%.
Savings are important because they provide the fuel for capital development. And it is new sustainable projects that will provide the employment opportunities so vital to the restoration of the country’s social fabric.
However, any increase in savings has to be stimulated by lower interest rates, because lower finance charges means an increase in personal disposable income, some of which will be directed to spending and some to savings.
In economic terms, any rise in the rate of spending implies a relaxation in the availability of credit (and easy credit is regarded by many as the principal cause of inflation).
Over the past decade the Reserve Bank’s principal target has been to bring inflation under control.
>From a peak close to 20% in the mid- Eighties, it is now down to about 8%.
If Czypionka is right, Thabo Mbeki’s timing couldn’t have been any better, since he becomes president just as all the important fundamentals signal an economy ready to be primed.
Mbeki’s government now needs to put together an economic package which will signal to foreign and domestic investors that it will hold fast to its predecessor’s commitment to market-based policies.
As Czypionka’s argument goes, this process will tell foreign investors that the South African economy no longer deserves the risk profile attached to the emerging markets with which this country is (sometimes) so inconveniently lumped.
Czypionka believes a combination of faster GDP growth and progressively accelerating economic expansion, combined with lower inflation, can produce a doubling of the investment rating of many Johannesburg Stock Exchange (JSE)companies. There is clearly room over the next few years for the prices of JSE-listed companies to rise materially.
All this will be sustainable only if the global economy keeps on expanding.
Czypionka warns that the major threats to this country are the possibility of another emerging -markets crisis (perhaps triggered by China or India) and what he calls “the very real chance of a world equity market collapse.”
Of great concern is the state of the United States economy, the great engine of world economic growth and stability.
It is, says Czypionka, “hot with credit”, and plagued by negative savings and a large and burgeoning trade deficit.
So we’re not out of the woods yet.
South Africans have accepted a continuous belt-tightening over some years, and one result of taking this medicine is that the economy is a lot more robust and ready now for a controlled take-off.
But our fortunes are inextricably interwoven with those of the global environment – more so now that tariff barriers have come down and exchange controls have been eased.
There’s certainly no room for complacency.