The government can use President Donald Trump’s looming 30% tariff on South African exports to the US as “a wonderful excuse” to implement key pro-growth policy changes, says Dawie Roodt, chief economist of the Efficient Group.
“BEE and expropriation, for example, are policies that will not be changed because of ideological and political reasons. But now this can be used as an excuse to say, ‘We need to change these policies because if we don’t, we are really heading for a disaster.’”
The response of the government so far suggests it is in denial, he says.
“This is major stuff. People say Trump always changes his mind, and this is what the president and the ANC hope is going to happen. Either they think he’s going to change his mind, or they are too ideologically stuck to change what needs to change, or they just don’t see what is coming or understand quite how tough this is going to be for us.”
A bigger threat than the Trump tariffs, says Roodt, is that the ANC is still in charge politically and still ideologically committed to economically ruinous policies such as BEE and cadre deployment, which mean ongoing incompetence and corruption at all levels of government and state-owned entities.
“We’re heading for a train smash in South Africa with or without Trump’s 30% tariff.”
All the most recent numbers show this, he says: no economic growth in the first quarter, and a very weak second quarter as well.
In his medium-term budget policy speech in October finance minister Enoch Godongwana said he expected 2% economic growth, but the country’s not even going to see 1% this year, says Roodt.
“Take anything away from that and you have very little to no growth at all.”
The Trump tariff could shave off 20 basis points (bps) but 20bps off 1% is a lot more than 20bps off 2% or 3%, Roodt says.
“So every little bit of economic growth we can get really makes a huge difference right now for all sorts of reasons, including employment — because we are shedding jobs — and poverty, because absolute poverty in South Africa is going up. Children are dying of hunger.
“It makes a huge difference because it puts the revenue of the state under a lot of pressure. If the revenue is under pressure, then cadre opportunities are also under a lot of pressure, and that leads to more political tension within the ANC, which is a bad thing for the country.”
On top of all of that is the “horrible situation” at local government level and in SOEs, and a “seriously deteriorating situation” as far as the national accounts are concerned, in terms of debt levels and deficits,” Roodt says.
Put all this together and I have absolutely no doubt we’re heading for a financial crisis
— Dawie Roodt, chief economist of the Efficient Group
“Put all this together and I have absolutely no doubt we’re heading for a financial crisis.”
The so-called national debt — excluding local authorities and SOEs, which are at least R1-trillion in the red and banging at the minister’s door for more money — is about R5.7-trillion, or 76% of GDP. About 13% of it is denominated in foreign currency, mainly dollars.
“Fortunately for us, that is fully covered by the reserves at the South African Reserve Bank. When you don’t have enough dollar reserves to pay off your dollar or yen or whatever debt, you’re in serious trouble.”
South Africa does not have that problem, he says, meaning it probably wouldn’t have to go to the IMF to get balance of payment support.
Of the remaining rand-denominated debt, about 20% is held by foreigners, mostly Americans and Europeans. They still hold that rand-denominated debt because the real return on that is more than 7%, which is the highest in the world. They are buying a very cheap currency and are buying into a very liquid and well-managed market.
“The problem is if Trump decides that his pension funds will not be allowed to buy South African rand debt anymore, then the Americans are going to start selling their rands. If the economy keeps growing at its current negligible rate, then the Europeans may also decide that although they’re getting very juicy yield, they don’t want to hold rands anymore because the debt levels are getting so high.”
And the day is going to come, Roodt says, when not only foreigners but also South Africans are going to start selling their debt.
This means an increase in the supply of the rand, which then falls in value.
“The question now is whether the Reserve Bank wants to protect the exchange rate of the currency or not. If they do try to protect the exchange rate of the currency they’re going to lose those reserves.”
Roodt says Bank governor Lesetja Kganyago is unlikely to try to protect the exchange rate but will increase interest rates, “and then South Africa's economic growth will be even lower”.
“If foreigners sell our rand-denominated debt, then somebody must buy that. And the biggest buyers of that debt are South African banks. The Bank is getting uncomfortable with this and has said so.”
If foreigners keep selling, long-term interest rates will go up, the value of those assets will go down and the balance sheets of local banks will come under pressure.
“So this is the potential scenario: foreigners sell our debt, the rand goes to pot, long-term interest rates go up, our financial institutions start getting into trouble and short-term interest rates go up. That’s what it's going to look like.”
To ensure foreigners do not sell South Africa’s debt the government must cut state spending or put measures in place to grow the economy faster, which will also increase tax revenue.
To accelerate growth Transnet, Eskom and other SOEs and municipalities will have to be run properly and corruption will have to be tackled. This will mean scrapping BEE and, “perhaps most importantly”, ruthlessly implementing the recommendations of the Zondo commission into state capture, which he does not see happening “because then you’re going to lock up your buddies”.
“With the right political will to make key changes quickly, we can solve our problems.”
But then the ANC would have to take the Trump tariff as a wake-up call to dump its ideological fixations and get real, he says.
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