The house Trevor built

Has Trevor Manuel spent 12 years constructing an economic breakwater strong enough to absorb a violent storm? Or has all his spadework left him on a narrow and fast-eroding sandbar with the tide rushing in?

Manuel’s perch is surer than that of his rich country counterparts, but his medium-term budget policy statement this week came from a much less stable background than usual.

Projecting government spending plans three years into the future amid political upheaval is hard enough, doing it against the backdrop of global economic uncertainty is all but impossible.

There are many clues in the medium-term budget policy statement (MTBPS) about the anxiety at the national treasury. But the finance minister’s act is very good.

He sang You’ll Never Walk Alone to journalists; he left intact the plans for government spending increases that will keep the economy ticking amid slumping consumer and export markets; and he got in a few jabs at the leadership of the communist party and Cosatu.

Liduduma lidlule,” he said in his speech to the National Assembly, ”the thunder will pass. We can say to our people: our finances are in order, our banks are sound, our investment plans are in place — we will ride out this storm, whatever it takes, together, on the strength of a vision and a plan of action that we share.”

It was the pose of a man who spent hours weatherproofing his house while his neighbours basked in the sun, and who is now warm and dry inside, while they call in the rescuers.

”I am aware that our policy decisions have sometimes been controversial. But if our economic policies were designed for their populist appeal, if we tried to finance everything at once, for everybody, then short-term gains would quickly give way to long-term misery,” he told Parliament.

The message was: the disciplined fiscal approach and tight monetary policy derided by the left as the ”1996 class project” were crucial to South Africa’s relative insulation from the global financial crisis.

”It was a class project,” Manuel told the Mail & Guardian in an interview, ”a working class project.”

But the truth is Manuel wasn’t singing a happy tune, he was whistling through a graveyard to keep his spirits up.

The MTBPS was bracketed by the economic summit of the tripartite alliance at the weekend, and on Wednesday by rapid spreading of what started as a ”developed country crisis”.

Argentina nationalised its pensions funds, raising the risk of default on its external obligations; developing country currencies, including the rand, plummeted; and stock exchanges from Turkey and Hungary to Johannesburg dropped suddenly.

South Africa is exposed to these threats not only because it is a small, open, resource-dominated economy, but because state investment in infrastructure and booming consumption have pushed our current account deficit into frightening territory.

Treasury estimates the deficit will be 8,1% of gross domestic product this year, while the International Monetary Fund thinks it will pass 9%.

South Africa spends and invests more than saves, and uses cash from outside the country to finance the difference.

We send money out of the country to buy power stations and flat-screen televisions, but we haven’t balanced this spending with export earnings and dividends from offshore investment.

Treasury was optimistic about the growing deficit as the gap almost tripled over the past three years — foreign investors poured cash into local stocks and bonds, happy to make up the difference. Now treasury mandarins are worried.

If investors decide potential returns in South Africa are outweighed by risk, they may stop sending us cash.
If that happens — and it may already be — the rand will stop sliding downhill and will instead fall off a cliff; access to foreign currency will dry up and the economic consequences will be catastrophic.

When the M&G asked Manuel on Tuesday what could be done about this he pressed his thumb to his forehead in a gesture of anointment and said ”olive oil and prayer”.

The orthodox solution, cutting back on the planned purchase of imported infrastructural kit, is not only politically unpalatable, as the treasury said recently, it would hurt longer-term efforts to remedy the situation.

If we don’t build better railways and power stations, we won’t push up commodity exports. Iron and coal will stay in the ground, and the rand will stay in the toilet.

The other orthodox solution, getting the government to save more on behalf of the rest of us, thus reducing our reliance on foreign funds, is also politically impossible.

Manuel downplayed the alliance summit’s declaration, which called for measures that fly in the face of treasury policy.

These included the upscaling of industrial policy; the ”calibration” of exchange and interest rates to suit such a policy; and discussions on expanding the social security regime to include a basic income grant, new unemployment benefits and more child support grants.

The ANC, Manuel said, takes binding policy decisions at its conference every five years, not ”on-the-hop”.
It is important not to over-emphasise the ”jump to the left” that is underway.

The Polokwane resolutions, partially echoed at the alliance summit, supported more state involvement in the economy through subsidies, tariff protection and tax breaks to help emerging industries.

Those resolutions, however, are not the product of the hard left. They are a policy approach that was developed and strengthened within Thabo Mbeki’s government.

Treasury always disagreed with this strategy, and the MTBPS shows that the financing department is still sceptical.

Industrial policy spending is capped at R5,6-billion and the document refers to the importance of competition and structural reform, not protection.

Under Mbeki treasury was able to hold the line, but that will become harder now.

”For all his faults Thabo Mbeki understood macroeconomics, these guys don’t,” said one official. Others were cautious: ”The minister absorbs most of the pressure, we are in a holding pattern,” said one senior treasury figure.

Does Manuel have lines in the sand? Would he rather step down as finance minister than stamp his signature?

The statement shows his intentions are clear — inflation targeting stays, budget deficits are modest by bloated global standards and money goes to departments that perform.

Further than that Manuel will not be drawn, sticking to the position that he implements Cabinet decisions.

”There are things that, if I had to put up my hand and come to the front of the queue and support, I would not, like the arms deal, and certain vanity projects, but you take decisions as a collective.”

That may be true, but make no mistake, the political and economic weather is brutal. We all live in the house that Trevor built, but it is not his fault if it takes more than singing to keep us warm.

Plummeting rand has two sides
The rand weakened further against the dollar this week as emerging markets took a hefty knock amid fears of a worldwide recession and continued investor risk aversion.

The rand has been the worst performing emerging market currency this year, according to Stanlib economist Kevin Lings. South Africa’s stock market lost 59% of its value in dollar terms.

Lings says that while the situation could worsen if the flow of money leaving the country does not ease. However the weak rand, along with our high interest rates, could be seen as an investment opportunity drawing capital back to South Africa.

Similarly Azar Jammine, chief economist at Econometrix, says that the weak rand is acting as a buffer for the real economy (the actual volume of economic activity taking place on the ground).

”It will have a negative impact for consumers but a positive impact for producers,” said Jammine.

Emerging market currencies everywhere are seeing similar fall out. Countries such as Turkey, Brazil, Poland and Hungary all saw their currency value plummet against the United States dollar this week. In Argentina, revelations that the state is nationalising private pension funds in a bid to avoid defaulting on its debt, spread panic amid investors in emerging markets, and saw a 10% drop in local stock, reported Reuters.

But, says Jammine, with these currencies falling, imports from emerging markets to developed nations will become cheaper thus boosting production. Nevertheless, the rand remains vulnerable particularly because of our large current account deficit, a measure of our trade with the rest of the world.

South Africa’s need to reduce unemployment and increase wealth has meant the country needed to drive local growth through massive infrastructure development, requiring equipment and other necessities from overseas. This has left the country in the red, and the deficit is funded through foreign investment.

Lings says the ”nature of how we fund that current account deficit [through foreign capital] makes us even more vulnerable”. In the month to October 22, foreigners have been net sellers of South African equities to the value of R22-billion.

But the fact that the rand is a floating currency, and does not have a fixed exchange rate to artificially strengthen it, may work in our favour, says Lings.

”It allows investors to exit quickly, but also to re-enter the market fairly easily. Despite the high deficit, South Africa’s fundamentals are very good,” he points out.

”Our corporates are sound, our banking system is sound and we are not in danger of defaulting on our debt — the rand presents a buying opportunity.” — Lynley Donnelly

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