Three challenges facing South Africa
By Cees Bruggemans, Chief Economist of FNB.
Last week saw three major challenges facing South Africa reach the news headlines simultaneously.
The SARB Governor in her monetary policy committee statement referred to the European crisis as lacking meaningful progress towards resolution, with major implications for the region and those exposed to it.
A day earlier, Moodys had put South African government debt on watch for a rating downgrade, a shot across the bow that shouldn’t be denied (as some immediately were prepared to do) or swept under the carpet and ignored.
And ANC Youth leader Julius Malema was suspended for five years for bringing the ANC into disrepute, but which ruling could not wish away fundamental issues (disquiet over historic iniquities and inequalities living on in new embodiments today and into the future).
Each of these three dimensions are major and reach into the very core of our national being, mostly as major risks, but also by offering opportunity.
The SARB Governor held boldly that since the last MPC there had been no meaningful progress of resolving the sovereign EU debt crisis, with the primary focus now on Italy and Greece.
In particular, this protracted crisis has now spread beyond the peripheral countries despite recent attempts to devise a credible and workable approach to contain the problem, heavily weighing on growth prospects in the region and beyond.
Yet over the past two years the euro-zone lifeboat has been steadily enlarged. Greece, Ireland and Portugal have been given assistance. Private debt holders of Greek debt have agreed to 50% ‘voluntary’ haircuts. EU banks have been told to raise their capital buffers by €106bn by mid-2012, raising bank capital ratios to 9%. Greece last week gained a technocratic caretaker government under Lucas Papademos and as early as this week Italy may gain something similar under Mario Monti. Throughout, the ECB has provided liquidity to EU banks and has kept sovereign debt markets functional.
Much of this may not feel like ‘progress’, but that doesn’t mean Europe isn’t steadily, if slowly in typical European step-by-step fashion, moving to resolution.
This may be so even if markets keep worrying over risk, pushing yields of the most suspect countries steadily higher, while the banking measures are inviting banks to achieve higher capital ratios through balance sheet shrinkage (mainly by selling non-Euro assets), alongside fiscal austerity weighing on growth in the short term.
Despite all the expressed fears daily, about the EU existential threat, countries leaving the Euro and associated financial turbulence and accompanying EU recession, it could well be that Europe is gradually shaping solutions suitable to its complexity, with growth suffering in the short-term but its implications worldwide less severe than imagined.
One US bank last week described it as Europe temporarily decoupling from the world, bearing in mind that Asia (and America) keep growing with no evidence of double-dipping.
So whereas at times it may look as if Europe could take much of the world down with it, the actual playout over time may prove far less severe for the world (though not for the affected Europeans).
Meanwhile both Moodys and Malema have been zeroing in on a few too many inconvenient South African home truths.
Moodys action in putting South Africa on notice (“watch”) reflects its sense of heightened political risk at a time of more constrained public finances.
The rating agency is worried about popular pressures and rising internal strains within the ruling ANC and between it and its partners and what all this may lead to eventually.
Moodys indicated that 3%-3.5% GDP growth over the medium term is insufficient to prevent high unemployment from rising yet further, worsening social tensions.
Also, calls for intervention aimed at ‘quick fixes’ for black economic opportunities are seen as negatively impacting private investment (and thus growth).
This occurred the day before Julius Malema was suspended for five years as ANC youth leader.
Though Malema may have been mostly a creation of the media, the issues explored by him and others are real and fundamental to South Africa’s being, as much its past as its present, and if nothing changes, also its future.
Can the country as presently constituted and following best-practice policy advice from abroad, succeed in growing and transforming fast enough to accommodate the aspirations, expectations and entitlements of its increasingly impatient population?
Revolutionaries, and those seeking to ride on their coattails for own gain, see the need to break old moulds, in the process potentially succeeding in undoing the country rather than generally uplifting it.
More thoughtful elements in South African society prefer to stick with tested formulas, even if these take time.
The tragedy is that South Africa has so far proven unable to outperform and gain a much richer, fairer, more inclusive dispensation faster.
Instead, its past iniquities, present choices and the need to feel its way politically keep it from making bolder reforms, reshaping its economy’s supply side in sensible ways and achieving a faster pace of expansion and transformation, thereby also safeguarding political and social institutions won at great historic cost.
Thus South Africa isn’t short of challenges, as much on the global stage from crisis-prone Europe (and the fierce competition offered by upcoming EM competitors) as our many internal divisions, shortcomings and difficulties in making bolder policy reforms to break the logjams of the past (rather than tearing down our common home in the name of some revolutionary creed).
We have reason to be concerned, though not to despair, as we keep finding our way forward.
Not unlike those snail-like Europeans.
Source: Cees Bruggemans, FNB, November 11, 2011.
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