In 2013, at the time of the Bernanke “taper tantrum”, SA had the dubious distinction of being lumped together by investors with Brazil, India, Indonesia and Turkey as part of the so-called “Fragile Five”.

Investors did this because they considered these countries the most vulnerable to capital outflows once the US Federal Reserve stopped buying bonds and allowed US long-term interest rates to rise. All of the Fragile Five countries were viewed as having uncomfortably large external current account deficits, relatively low international reserve levels, poor economic growth records, and relatively high inflation rates.

Fast forward to July 2021, and on what increasingly is appearing to be the eve of another taper tantrum SA has seen its external current account balance swing from a large deficit to a comfortable surplus. However, largely due to the Covid-19 pandemic, it has seen a major weakening in its already poor economic growth performance. Worse yet, it has seen a major deterioration in its public finances. That deterioration is now bound to raise serious questions about the country’s ability to service its debt in a less benign global liquidity environment.

The magnitude of the deterioration in SA’s public finances is alarming. According to official forecasts, the country is now running a budget deficit of more than 14% of GDP, while its public debt to GDP ratio now stands at 85%. That is more than double its 2013 level. This puts SA in the dubious company of other emerging market countries with serious public debt problems, such as Brazil, Colombia, Hungary and India.

This raises the following questions:

  • What might SA policymakers be able to do to prepare the country for the next taper tantrum?
  • How much time does the country have to prepare for that tantrum?

The most important thing SA policymakers should do is devise a coherent plan to assure investors that the country will be able to service its public debt. One component of such a plan would be undertaking serious economic reforms, especially in the labour market, to make the economy more competitive and place it on a much faster economic growth path than it has been on to date.

Since it is doubtful that higher economic growth alone will be enough to put the country on a more sustainable debt path, serious tax revenue measures and public spending cuts should be enacted to bring down the budget deficit. Such measures would allow the Reserve Bank room to lower interest rates, which would be good for promoting economic growth and reducing the government’s interest payment burden.

Since it would be an understatement to say SA’s economic policymakers lack market credibility, it would be best if any economic reform and budget reduction effort were made within the context of an IMF borrowing programme. Not only might the IMF’s seal of approval help rebuild market confidence, its lending would help bolster the country’s international reserves during forthcoming market stress.

On fire

It would seem that the window for SA policy action ahead of the impending global liquidity storm is rapidly closing. Fuelled by its largest peacetime budget stimulus on record, the US economy is recovering at its fastest rate in the past 40 years, and inflation is now running well above the Federal Reserve’s 2% inflation target.

The US housing market appears to be on fire, with home prices now well above their pre-2006 bubble peak levels. It must now be only a matter of time before the Fed starts tapering its aggressive bond buying programme.

With the window for policy action rapidly closing, SA economic policymakers must act boldly now if they are to spare the country from yet another currency and credit market crisis when the Fed finally acts. One has to hope they have the wisdom and courage to make use of what is all too likely to be their last chance to strengthen the country’s economic defences before the coming global liquidity storm.

• Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the IMF’s policy development & review department and the chief emerging market economic strategist at Salomon Smith Barney.


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