Hear the Radio Interview
South Africa is currently the slowest growing economy as measured by The Organisation for Economic Co-operation and Development (OECD) for 44 countries they track that have 2Q2018 data available. It’s the slowest this quarter, it’s the slowest over the last two quarters, the slowest over the last three quarters and the slowest over the last 4 quarters which we display below:
It’s impossible to pinpoint any one contributing factor, but anyone taking notice of the news over the last year would probably come to the conclusion that any combination of the below are potential culprits:
- A decade of widespread government corruption and brazen state-capture estimated at R100bn loss to the fiscus,
- Nepotism, mining & manufacturing policy uncertainty and gross mismanagement and looting of State Owned Enterprises (SOE) requiring costly bailouts totalling R59bn this year with near to R500Bn in SOE debt guarantees held by the government.
- Collapse of municipal finances and delivery capability, over R28bn in irregular expenses and R140bn owed by consumers
- The fall from excellence at SA Revenue Services due to maladministration, losing the fiscus some R50bn
- Lack of leadership and follow-through on the National Development Plan and general SA economic mismanagement,
- Runaway government debt, which together with SOE guarantees puts our debt-to-GDP ratio at a dangerous 70%
- A bloated civil service with year after year above inflation wage increases, pushing public sector wage bill R30bn over budget
- A recent populist far-left focus in the runup to elections, leading to a collapse in business confidence and private fixed investment at 13-year lows
- A death-blow to agriculture from lack of drought planning and response by the bankrupt Department of Water Affairs and Sanitation
- SA’s biggest corporate collapse, Steinhoff, that wiped R300bn from investors and pension fund portfolios, a severe dent to the "wealth effect" leading consumers to pull back on spending and investment
- Admirable, but completely unaffordable free tertiary education, costing the fiscus some R50bn that had to be taken from other developmental projects
In fact, South Africa lost a potential R1 trillion in gross domestic product (GDP) growth to bad governance during the last few years of former president Jacob Zuma’s term, according to Nedbank chief economist Dennis Dykes.
All of the above have led to the Rand plunging, runaway electricity and municipal levies, inflation creeping up with raised taxes, escalating imported fuel prices and fuel levies coupled with a VAT hike as the government attempts to continue funding its largesse, which has finally led to the SA economy succumbing to a "death by a thousand cuts".
All this against the backdrop of a booming global economy. In fact, right now, SA is the only OECD country in technical recession in addition to being the slowest growing country over the last year. There is simply no blaming the Global Financial Crises of 2008 as was the favorite pastime of the previous administration. The new administration has a huge hill to climb, due mostly to self-inflicted injuries. What took a decade to inflict on our beleaguered economy is likely going to take a decade to unwind.
The ever-widening gap between SA and the developed and emerging sectors of the global economy over the last 5 years are stark...
If one takes our GDP and divides it by our population, we get a metric called "GDP per-capita". As our population is growing faster than our GDP, things look very much worse than the charts above imply. Per Capita GDP peaked in December 2011 and last year in December it was down 25% from this peak. This means South Africans are getting poorer and poorer.
The ANC announced in a special press conference after the recession revelations that the government should respond with a stimulus package. It concerns me that we wait till we are in recession before demanding stimulus packages. As we can see above, the warning signs with the SA economy and particularly the jobs situation has been with us for at least the last 5 years. And to be frank, where is the money for a R40-R50bn stimulus package going to come from? The down-and-out taxpayers?
Looking to government for a stimulus package is barking up the wrong tree. Corporate South Africa is sitting on record cash deposits of about R1,400 billion, an amount that could help boost economic growth if it were reinvested in the economy. But this will not happen when business confidence and confidence in the government and property rights are under threat.
We track a one-quarter ahead GDP forecast model that accurately predicted this quarters’ negative GDP print. Preliminary data show that the 3Q print is likely to be very muted, meaning the situation is not likely to improve overnight.
On a lighter note, there is an old joke in economic circles that by the time your reserve bank or government statistical department admits to a technical recession, odds are that we have already emerged from it. The historical prevalence of 3 consecutive negative quarters of GDP is very low. So hopefully the worst is over.
The Rand to the Dollar, so important as we import almost everything and manufacture very little, paints a depressing picture as it embarks on another protracted bout of depreciation that could very easily blow north of R20/$ in ensuing months :
"How did you go bankrupt?" Bill asked. "Two ways," Mike said. "Gradually and then all of a sudden." The dialogue is from Ernest Hemingway’s 1926 novel, "The Sun Also Rises". Nations go bankrupt in the same way. They all happen gradually... and then suddenly it’s upon you. History is replete with examples of nations that have suffered this fate, from the Weinmar Republic in 1929, the collapse of the Soviet Union in 1991 to Argentina’s millennial financial crisis in 2001, Zimbabwe’s financial collapses in 2009 and Greece in 2010 and more recently Venezuela.
The warning signs are always there, even at the beginning and over a period of years, sometimes decades, a tiny trickle of warning signs turns into a steady stream... and eventually a great flood - and things seem so perfectly obvious in hindsight after the damage is done.
We have time to fix this but are running out of options. One sincerely hopes the government realises this and is focusing on fixing the right things rather than trying to stay in power and play to populist anti-economic themes. We are traditionally long on talk, summits, lekgotlas and ideas but very short on execution. There is an accepted plan, called the National Development Plan, but it just can’t get off the ground.
Despite all this negativity, SA as a nation always seems to pull a rabbit out of the hat and pull together. In this case, we need a concerted effort from government, business, labor, and all its citizens. None of these entities are going to pull any rescue off without the other. And we need accountable owners for programs in government because weak execution and poor planning hides too easily behind the government’s current stance of "collective responsibility". The luxury of hiding behind a collective are a distant memory.
But in the interim, if you feel hopeless, you are not alone. None of this is in your control. The only thing in your control (other than emigrating or pressuring your political party) is to hedge against a forever depreciating Rand and numerous means are available provided you have a diversified multi-asset approach:
- Stable currencies such as the Swiss Franc
- Gold ETF’s (not the physical stuff)
- JSE Rand Hedge shares and ETFs
- Future Industry ETF’s
- Offshore shares and ETFs
- Locally domiciled offshore feeder funds
- International Property (physical or ETF’s)
Sharenet has an entire department of Wealth Advisors, Financial Planners and brokers specialising in Rand Hedging and offshore portfolios and you can contact them with the form below:
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.