Economy will probably go from bad to worse before ANC engages with IMF
Growth paths are elusive as our economic debates are warped by politics, while repairing the debt trajectory requires astute restructuring and policy reforms. The IMF’s advantage is that it deciphers economic woes and governance failures dispassionately. But will the lender of last resort deem SA’s politics incorrigible?
Global integration, and its benefits, have extinguished the concept of economic sovereignty. This era’s most formidable economic trends, technological advances and globalisation make adding value within global supply chains a non-negotiable for achieving rising prosperity. Yet SA continues to prioritise redistribution, which provokes an inward focus, so our per capita income has stagnated for a decade.
Our pre-Covid-19 purchasing power was inadequate to reduce unemployment and poverty. Consequently, a majority of South Africans have become reliant on the state for vital monthly payments, contributing to the state’s debt trajectory becoming unsustainable. The day of reckoning was postponed by households borrowing to maintain spending levels but, critically, those borrowings undermine purchasing power growth.
The IMF is uniquely experienced at assessing sovereign debt sustainability. Our debt trajectory cannot be made sustainable without restructuring the economy to swell exports while “reprofiling” government and household debt. But how much political adaptability is plausible before, or even after, the 2024 scheduled elections? Whereas betting on 2024 is a distant and vague proposition, the ANC’s lockdown decision-making lethargy points to it minimising IMF engagement for as long as possible.
The pandemic has worsened a long-percolating debt crisis while the nation’s ability to cover its imports has been benefiting from rising metal prices amid soft oil demand. Our present ability to fund imports encourages the belief that we can continue with meagre global integration if we can just access more capital. And the world has never been more flush with capital. But SA is not close to covering its high capital costs or constraining its reliance on debt. Nor are we positioned to meaningfully reduce unemployment and poverty.
The economy can only service the ballooning debt burdens through sustaining high growth. This is mathematically impossible unless exports grow sharply. Whereas our politics block accepting this, the IMF’s debt sustainability analysis will highlight it. The supranational’s lending criteria will require broad policy reforms and much debt restructuring before it can offer SA a large borrowing facility.
The ANC wants to attract more capital to feed its patronage network, but the nation’s repayment capacity has been exceeded. Focusing on infrastructure investments sidesteps the implications of stagnating domestic consumption. In the absence of a sustained surge in exports, accompanied by much debt relief, our horrendous levels of unemployment and poverty will be entrenched for decades.
Global discretionary spending is at least 300 times greater than SA’s and set to grow much faster. The dozens of countries that have pummelled poverty realised that their domestic consumption couldn’t possibly sustain a high growth trajectory. Why would SA be any different?
During the capital-scarce sanctions era, growth hinged on investments in mines, which spurred export growth. Today, with our domestic consumption set to stagnate indefinitely, investment inflows can only unlock adequate growth if they also increase exports. While our households were becoming excessively indebted, intense integration into global supply chains was becoming a 21st-century necessity.
New loans to overindebted, economically enfeebled entities are typically contingent on policy shifts and concessions from existing debtholders. A substantial IMF engagement would need to meaningfully mitigate our economy’s core disenablers, patronage politics and inadequate market access.
The phenomenal rise of Asia reflects investors providing capital, knowledge and often market access so local workers can add value to exports. Growth is then limited only by competitiveness.
SA’s resource wealth and entrenched patronage are characteristics common among countries where IMF assistance efforts have been stymied. More off-putting still, SA’s dysfunctional politics and economics trace to race-based legislation furthering widespread patronage. Conversely, the fund’s political masters will worry about contagion as SA has the most advanced economy in the world’s poorest region. Ultimately, the IMF’s capacity to engage the ANC could be constrained by an unprecedented spike in demand for its services.
The IMF won’t want cuts in vital support payments to millions of poor South Africans. It would prefer cutting back on the public service wage bill, accompanied by forced concessions by consumer lenders. Union acquiescence would be less elusive if members weren’t so frequently overwhelmed by expensive debt. The Marikana tragedy was spurred in part by its miners’ overindebtedness.
Business groups and the ANC advocate huge infrastructure projects without having developed a plausible growth plan to service the nation’s burgeoning debt. The IMF’s toolkit better suits the economic challenges, and the Covid-19 crisis should be providing political flexibility. Instead it looks like meaningful political engagement to fix the economy requires a credit crisis.
• Hagedorn is an independent strategy adviser.
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