What now? We have a lower inflation target, a reduction in local bond issuance, a re-affirmation of a primary surplus pathway, the start of spending reviews and cuts, an upgrade from rating agency S&P and we’re off the greylist, not to mention a successful hosting of the G20.
What’s more, the door has been thrown ajar for a fiscal anchor to be announced in the new year, and the budget seems to have enough space and flexibility for a further cut in issuance of local bonds.
The timing of some of this was a surprise, but none of it should have been a surprise that it happened, which speaks to something of a problem around expectations and sentiment.
The inflation target change came together remarkably quickly after both sides in the debate had indicated to the market a month prior that it would happen only at the budget in February. Similarly, issuance cuts seemed clearer in the future but came together at what felt like the last moment as revenue run-rate stars aligned.
The primary surplus fiscal pathway, while full of risks for sure, was clear for some time as a central case (or at least something far closer to the Treasury’s view than where consensus broadly was over the past year). Getting off the greylist, again while not certain, was a clear pathway. On the G20, people seem to have forgotten many successful events hosted before (even if the smoothness here went above and beyond — not to mention the food in the media centre).
Sure, how we got to this place raises some questions: the Reserve Bank’s somewhat maniacal route to the initial de facto shift in target, the flimsiness of the flowers suddenly planted at Johannesburg road interchanges on the route to Nasrec, budget cuts now raise questions about why they couldn’t have happened before.
Making things look easy should also give us pause for thought. The suddenness of the inflation target change breeds conspiracy theories and is why the exchange of letters on the subject between the Treasury and Bank should be published as soon as possible.
The G20 logistics success papers over the fact that the words “nonbinding” and “voluntary” appear more than 30 times in the declaration, and many of the issues (around African debt, for instance) will take a decade to effect change and require the stamina of the government and particularly the international relations department, which it is not known for.
The exit from the greylist now does not remove the (meaningful, even if not baseline) risks of being back on it in 2028, as the bar keeps rising.
A question that arises is obviously that if things can be done when such a moment arises, why aren’t they normally possible — in particular around Johannesburg?
Yet it shows political moments can come together and government can rise to the challenge. Despite leaning into quite sticky historical market scepticism, the medium-term budget policy statement (MTBPS) ultimately showed what can be done once the cabinet takes a simple, high-level decision that macro-sustainability must come before splurges, and learns the lesson of the VAT drama earlier in the year.
The moment is palpable. Sometimes statements of the obvious — or seeing things with one’s own eyes — are important. I met many foreign investors and visitors at both the B20 and G20 who seemed shocked that they were not car-jacked and had eaten out in some nice restaurants, and said SA had pulled off a successful set of events.
Our country is beguiling in spite of its madnesses, and there has been no better remedy for some of the drama that plays out — and is projected out — than people coming to see firsthand through the past year.
The statement from the US Chamber of Commerce last week that it was taken aback by the “sophistication” and attention to detail of SA business was necessary to state (particularly given the bilateral relationship) yet is also a statement of the bleeding obvious to anyone who works with the private sector or interacts with it. The same can certainly be said of the Treasury and Reserve Bank’s involvement in the G20 finance track.
The mood of locals in the week since the MTBPS and then at the G20 and B20 was buoyant and unlike anything I’ve seen in recent times — more genuine than the Ramaphoria of 2018 and, importantly, more evidence-based.
Not all rosy
However, all is not well, and there is much to do. Optimism over the recent unemployment data (combined with guff from the government in the form of a cabinet celebration) missed the point that it was driven by huge underlying methodological changes, with Stats SA saying this meant comparability with prior data was not possible on the surface. Indeed, extracting from the changes that have been made, the labour market looks very weak.
Equally, on the fiscal front, while we are undergoing a macro-policy big bang and consolidation is ongoing, with debt peaking this year, the micro-fiscal picture is a mess given the inefficiencies of the state, at local and provincial level in particular. This is generating huge underspend on top of prior cuts because of lack of capacity. This will take a long time to rectify.
Reforms are also — not unexpectedly — taking a long time to finish, as much as they advance in the short term. Operation Vulindlela has itself expressed frustration with other role-players, such as the department of electricity & energy, for electricity reforms taking too long. As such, getting growth (a proper leap higher in growth, not just a pip upside here or there) is going to take time, and we shouldn’t expect the current mood to affect that pathway much until more reforms are actually complete.
Lower nominal rates can support sentiment at the margin, but real rates remain elevated, meaning the amount of growth upside is limited. Benefits to households and businesses of lower inflation are positive but will take time to be felt.
We come back then to the familiar issue of patience. There are two scenarios, the first being that the recent successes and the positive mood risk actually reducing the patience that is needed to solve the deep and complex problems society faces. The mood can turn sour quickly.
The second is that the recent mood re-energises determination concerning the underlying reforms and boosts patience for growth to appear in the longer term. Yet this route also risks complacency, as we’ve seen with load-shedding and energy reforms. If growth is naturally appearing from short-run sentiment, why bother doing hard structural reforms?
All this points to the need to carefully introspect on what exactly we are positive about and what exactly still needs to be done to achieve real results.
• Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham, a SA research-led consulting company.
This article first appeared in Business Day.
Image Credit: