Greg Volkwyn: What happened to the pot of gold?
The seeds of the economic crisis were sowed a long time ago as the era of political intervention gained momentum. Power is a heady drug that has proved hard to let go of. Couple that with policy interventions in the economy and it didn't take politicians long to understand that with the right policy, they had the ability to stave off recession. At the outset it is relatively easy to control policy and success breeds confidence. The early success of Alan Greenspan gave him somewhat of a "Rock Star" status and it wasn't long before we hung on his every word. Economies grew and so did the egos of politicians and Greenspan and we all know that pride comes before a fall.
The crisis was well documented and here in South Africa we actually weathered the storm relatively well. We were still basking in the glory of the birth of our new democracy and everyone wanted a part of us. We had proved our detractors wrong as we managed to stage some of the world's great events with aplomb. Pride in these achievements culminated in the huge success of the 2010 World Cup.
The infrastructure build in the run-up to 2010 provided needed impetus for the economy while global markets were being ravaged by the global economic crisis. Unfortunately these successes papered over the cracks that were growing like the ever-increasing evidence of the decay in our infrastructure.
So where did we lose our way?
There is that classic old adage "be careful what you wish for".
In certain circles of the local economy we often heard the calls for the central bank to weaken the rand to make us more competitive. The loudest voices in this regard came from the likes of Cosatu and some sectors of government.
The old theory that the strength of a country is measured by the strength of its currency is being challenged by advent of Quantitative Easing. We have seen more and more central bankers succumbing to the temptation to manipulate currency levels to improve competitiveness. The past masters of this are the USA and Japan but let's not forget that this is a relatively new experiment and the end result is still uncertain. I always believe that there is no free lunch and at the end of the day you have to pay the piper.
It is a blessing that we have an independent central bank and we have been fortunate over the course of our new democracy to have had very competent people presiding over the central bank and the finance portfolio. In terms of the bank we in the past have seen the cost of attempted intervention in the currency market.
In the age of QE the bank has not had to act to weaken its currency as the unions have done the bidding for the bank and if there is one area that they have been successful it is in sabotaging the economy and causing the rand to weaken. Perhaps one should remind them that even if a weaker currency makes your exports more competitive, you still have to produce something. Producing more unemployed people is widening the gini coefficient that the unions hold up as part of the ills of the capitalist system.
In some ways it is unfair to lay the blame solely at the feet of the protest action that has escalated considerably after the realisation that the 2010 showpiece really didn't deliver anything tangible for the man in the street. A look at a chart of the rand against the dollar from 2008 makes for interesting reading:
As can be seen there is a direct correlation between protest action and the steady depreciation in the rand.
With the fall off in infrastructure build and the sharp drop off in demand from our major trading partners, growth has been following the wrong trajectory. Compound this with major strike action it's not surprising those international ratings agencies downgraded forecasts for the South African economy. Delays in the completion of Eskom's new power projects will prove critical in government, being able to implement growth policies and in terms of recovery, this may prove to be our 'Achilles Heel'.
The other 'Achilles Heel' is our current account deficit. In simple terms this is the country's bank account. As most of us at some stage have experienced when our account gets out of control and elicits a call from the bank manager to call you to order. Countries find that their currencies devalue as investors call you to order. The solution to this problem lies in increasing growth so that as a percentage of GDP, the current account deficit is reduced to levels that give investors some comfort.
The bugbear for the man in the street is the ravages of inflation and the effect it has on our disposable income. The one bit of comfort in coping with the continual escalation in prices was the fact that interest rates were sitting at record lows. We also had the benefit of cheap money flows brought on by most central banks' easy money policies helping us finance our deficit.
The consistent depreciation in the rand from early 2012 has seen a major shift in inflationary pressures on the South African economy. Bear in mind that inflation hurts the poor the most and so their discontent is not surprising. The escalation in petrol prices has negated any comfort gained from low interest rates for the more affluent of society. It is now commonplace for dinner table talk to be punctuated with complaints about the cost of living.
Those complaints got louder as Gill Marcus raised interest rates the other day. This did surprise the market, as the majority of economists expected no change. We were perhaps caught up in a confluence of events that tipped the governor's hand. The investment community seems fixated on acronyms like BRICS and the new one, the Fragile Five. We happen to be included in both, while in the BRICS we contribute just 3% of their combined GDP.
The question is do we fit in this grouping? Probably not. The Fragile Five include Brazil, India, Indonesia, Turkey and South Africa and we certainly belong in this grouping. This grouping has seen immense pressure brought to bear on their currencies and economies as international investors removed capital to the safety of the more mature markets.
Turkey - who is in this crisis - had to raise interest rates by a massive 5% the other day to stave off speculators that sold the Turkish Lira aggressively. The measure did help to stabilise the currency somewhat. The others in the Fragile Five also raised rates and that must have overridden any qualms that the Reserve Bank had about raising interest rates. Gill Marcus was at pains to say that the measure was to combat inflationary pressures and not as an attempt to defend the rand. There is now some consensus that we may well see another 50 basis point hike in rates in March and that is going to hurt.
South Africa's growth prospects have deteriorated with the slump in the rand and the ugly inflationary side effects that it brings. Add to this the effect of e-tolls, which is only just starting to filter through in cost pressures - the effect on the consumer is going to be hard to bear.
The pressure on the ruling party is also becoming hard to bear and they must realise that they must shoulder much of the blame for the malaise that we find ourselves in. Let me remind you that one of the triggers for the crisis in Turkey was a direct result of a corruption scandal in government. Perception is reality and we have to be seen to be doing something to alter the perception that corruption in SA is out of control.
The fear of a crisis in emerging markets has added pressure but perhaps it won't be as bad as some pundits are predicting. However hope is not a strategy and we will need to see investor-friendly policies implemented. The National Development Plan needs to be implemented ASAP. It also needs buy-in from all sectors of the economy. Unions have to understand that we need improvements in productivity and continued strike action will drive more of the new projects from the likes of BMW and Nissan to other markets.
We are competing with the more developed markets and there will be no free rides as we are no longer the flavour of the month. Remember though that improvement in the global economy will benefit us. It is not going to be an easy journey and we cannot afford be sidetracked into searching for rainbows.
Greg Volkwyn is a market commentator on 94.7 Highveld Stereo and 94.5 Kfm. Follow him on Twitter: