The David Gleason Column
It is always darkest and coldest just before dawn and our view of the future is coloured by the place we’re in at the moment. South Africa’s most recent economic experience has been pretty miserable and we have lost jobs in the formal sector at a great rate – as I reported two weeks ago.
If you stroll around the shopping malls what catches your eye is that there are plenty of folk about but not many are carrying large, full shopping bags. Things, as most businesspeople will tell you, are damned tough.
But this may be the very time to take heart from a few of those tantalising straws in the wind. And it may be, as we work our way painfully through the third quarter, that those same damn tough things are about to change. Is it possible that the lowest point in South Africa’s recessionary cycle has been reached and, if so, will spring advance signs of the long-awaited recovery?
Merrill Lynch economist Jos Gerson is a committed exponent of the yield-gap theory, which he considers a leading indicator of the business cycle. This theory is predicated on a simple enough equation – the relationship between the long-bond yield and the three-months money market rate. This equation produced an inverted yield curve for much of 1996, all of 1997, most of 1998 (except one month when the inversion falsely disappeared) and January this year.
Its very worst position was in June last year when the short-term money market was returning yields 4% better than long bonds. And the important feature is that it usually takes about 12 months or more for this to work itself through and out of the economy – which is why it’s possible to suggest the darkest and coldest hour is now.
It’s important to note that with the repo rate having fallen so dramatically and with bond rates bottoming, the yield gap has turned strongly positive. This implies we will experience a stuttering start to recovery over the fourth quarter (with the Christmas shopping returns being a lot better than in 1998). By this time next year it is entirely possible that South Africa will be enjoying a substantial economic recovery, one which could last two years or so (longer if we’re lucky and manage things well).
The dampener is that it’s also important, while considering the pleasures which could lie ahead, to think about the uncharted dangers which lurk. These revolve largely around Japanese recovery or continued slump and the effect these could have, either on continued United States growth or by triggering a collapse of the stockmarket bubble.
Sadly for South Africa, economic progress is invariably a case of skipping through minefields.
All of which leads me, in the week that Reserve Bank Governor Chris Stals stands down after 10 years in office, to contemplate this central bank’s principal responsibility: interest rates. Stals frequently alleged, when it suited him, that the market was responsible but, as we all know, the Reserve Bank carries the whip through its absolute control over what bankers used to call the “window”, the accommodation it provides in terms of the money it makes available and at what rates.
There are, by and large, two polar models for central banks. One is to employ a fixed exchange rate policy such as that used by Argentina and Hong Kong, and that Stals once described as a central banker’s “dream”. Its effect, carefully applied, is to get inflation down and to hold it almost constant. If that’s its virtue, its vice is that business cycles then groan under the stresses of massive amplitudes. Money supply is determined by the ebbs and flows of foreign investor confidence.
The alternative model – which we apply – is floating exchange rates in which the real target ought to be nominal consumer demand to produce steady growth. Too often it is money supply, which is too frequently a red herring.
Our failing is that we have not combined this with freedom from exchange controls. After nearly 40 years of these, we’re entitled to ask what they’ve achieved. They certainly didn’t bottle up private funds – once things were eased officially it quickly became apparent there wasn’t much left to shift. On the other hand, they have affected formal institutional flows. The continuing purpose of these controls remains a mystery to me – unless it is to give some officials a perverse feeling of comfort.
Conversely, getting rid of exchange controls will send a powerful signal that this government has nothing to hide and that it is prepared to live by the consequences of its policies. As I have remarked elsewhere in recent weeks, I know of no country that did not benefit massively from the confidence generated by the removal of exchange controls.
The change of guard this week in Church Street comes at an appropriate time for this government, which has been getting some important things right lately (labour legislation aside), to signal its unequivocal acceptance of market disciplines as applied through a truly free exchange rate.
l Economic hardship and financial constraints express themselves impartially. No sector is exempt, and newspaper proprietors also have to accept the market’s discipline. This is the last of these columns. I have enjoyed writing them, and I wish all of you and the Mail & Guardian kind fortune and good health.