Is South Africa following the route of Venezuela’s disaster?

There is a very clear signal that political uncertainty is impacting on the confidence of investors… If we fail to act to restore confidence, we are going to get into all sorts of trouble.

Venezuela is currently in turmoil that seems to be far removed from what South Africa is currently experiencing, yet the two have some jarring similarities, unintentionally pointed out by SA Reserve Bank governor, Lesetja Kganyago.

Kganyago, addressing Parliament’s Standing Committee on Finance on the role of the Reserve Bank and the bank’s economic growth forecasts, warned that political uncertainty will continue to limit the country’s growth prospects unless decisively dealt with.

“There is a very clear signal that political uncertainty is impacting on the confidence of investors… If we fail to act to restore confidence, we are going to get into all sorts of trouble,” Kganyago warned.

The South African economy has officially entered a technical recession, with the gross domestic product (GDP) contracting in the first quarter of 2017 by 0.7 per cent, following a 0.3 per cent contraction in the previous quarter.

Kganyago pointed out that the only two sizable economies currently in recession are South Africa and Venezuela. Every other global economy is showing some growth.

Venezuela is currently facing social unrest in the form of bloody protests as citizens and supporters of government opposition parties take to the streets, calling for president Nicolás Maduro to step down in the wake of the economic crisis facing the country (falling oil prices has led Venezuela to the brink of bankruptcy, with government policy exacerbating the situation rather than relieving it).

Kganyago’s comments regarding South Africa’s situation bore an uncomfortable resemblence.

“The contraction in the real GDP in the first quarter of 2017 was broad-based. Confidence and sentiment in economic indicators weakened further in the second quarter of 2017, possibly exaggerated somewhat by the political environment,” he said.

At the same time, a survey by RMB/Bureau for Economic Research showed that consumer and business confidence fell in the second quarter of 2017, and business confidence currently at its worst level since the 2009 recession. Concurrently, consumer confidence is at its worst level since 1982, with consumers concerned about their financial futures.

Kganyago pointed out the disastrous effect that political uncertainty has had on the economy, with multiple amendments to the mining charter, the remedial action recommended by Public Prosecutor Busisiwe Mkhwebane in her Absa/Bankorp bailout report calling for a change in the constitutional mandate of the Reserve Bank. Both of which are being currently being challenged in court.

“The independence of the Reserve Bank was applauded by rating agencies. Institutions that are working well seem to be under attack and that creates a significant problem,” Kganyago said.

However, Kganyago was able to find a bright spot in that consumer price inflation is low and the outlook on near-term inflation has seen a marked improvement. SARB expects an inflation average of 5.3 per cent in 2017, 4.9 per cent in 2018 and 5.2 per cent in 2019.

This bright spot encouraged the Reserve Bank to cut interest rates – for the first time in five years – by 25 basis points to 6.75 per cent.
South Africa may not be in exactly the same boat as Venezuela, but if government does not address the warnings issued by Kganyago, the Venezuelan dog show may just become the South African dog show.

Comments

comments

8Bit

We Recommend

Top