South Africa – so many challenges, so little time.

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By Adrian Clayton

Driving along the N2 yesterday I was again reminded without any doubt that South Africa is my home, not Britain, Canada or Australia, but SA with its unique problems and complexities that only a South African can relate to.

Other than swerving for the ever present N2 pedestrian traffic dodger that miraculously escaped a bumper or three, which can only happen in SA, it was actually my radio that left no doubt as to my location. The KFM newsreader quite casually relayed his transcript detailing a tale of Delft residents illegally occupying newly built homes and police requiring no excuse to open fire with rubber bullets to quell the unrest, to subdue any unreasonable expectation of becoming an instant home owner.

Whilst not belittling the strife of the Delft community, this story is much more complex than the issues that relate to one poverty and gang riddled community. It is instead a pervasive South African theme occupying all aspects of South African life. Unfortunately however, I have an inkling that until now the prosperous have largely been immune to the real pressures bubbling below the surface of our emerging democracy. Sure, terrible crimes take place daily that affect us all and cannot be discounted, but to a large extent until now, the rich in South Africa have only been beneficiaries of South Africa’s 1994 metamorphosis; it has cost them little. This does not imply that poor people have not also been massive recipients too during the past 13 years, government has constructed 2 million new houses, 84% of South African’s now have access to electricity and the social grant net has been cast over many of the poor….. and many of the not so poor. My point remains, however, that until now; more affluent South Africans have received much and given little.

But South Africa is on the brink of something very new. We face new challenges that are tending to contrive with remarkably accurate timing to unsettle what seems at the surface to be a stable environment. Firstly, during the past decade the global economy has been turbo charged and emerging economies have relied on their older and more developed siblings to propel them into prosperity. Now the older siblings are faltering and are likely to become guarded at sharing their spoils, consequently, emerging economies will need to increasingly look internally for their growth. Secondly, South Africa faces leadership change and unless I am mistaken, no South African can say with any degree of conviction who will lead this country in 2009. What we do know, however, is that our new leaders are united in their popularist rhetoric and this stands in stark contrast to the business-friendly but at times aloof personalities that have reigned till now. Thirdly, the honeymoon period granted by the poor is rapidly reaching an end and the ‘euphoric emancipation chemicals’ of 1994 are drying out. One senses a degree of expectation that is almost tangible and the protests around service delivery and the demands for free housing talks to this point. Finally, we face a very real economic problem of balancing price stability with growth imperatives and this requires the hands of a delicate alchemist at the helm of our Central Bank.

On the one hand we need to quell inflationary pressures and drive home the idea of price stability. As we have heard time and time again from leading figures in Government, inflation is the ultimate enemy of the poor. However, on the other hand, an immediate challenge for monetary and fiscal authorities is to keep South Africa’s GDP growth rate intact, an imperative ingredient for social stability and a reduction in the high levels of unemployment.

Attached is a graph showing how the latest year of interest rate hikes has inverted the local yield curve, implying short-term interest rates are at higher levels than long-term rates. It also shows annual GDP growth. The yield curve normally provides some insight into how the markets expect the profile of GDP growth to look over the following 12 months. Inverted yield curves during the dark old days in South Africa usually spelt forthcoming recessions, the old boom and bust scenarios. This seems unlikely now, but there is little reason to question the capital market’s ability to predict a radical slowdown in GDP growth and the lag is approximately 12 months.


Considering tailwinds have turned into headwinds, one feels that at present the SARB has an important instrument at hand to navigate our economy through troubled waters, namely interest rates. What is required is a less draconian yet rational approach to inflation targeting whilst seriously watching growth. Even as many writers argue that this would undermine the credibility of the SARB, this view fails to acknowledge that it is an approach widely used by Central Banks globally and credibility will always be retained when rationality supercedes dogma.

In conclusion, we continue to feel that South Africa is in a position to play a central role during this age of emerging industrialization and our resource base is key to this theme. However, we face headwinds but these are navigable with correct policy implementation and strong leadership which is mindful and sympathetic to the complexities within our country.

Source: Adrian Clayton, Alphen Asset Management, February 20, 2008.

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