MICHAEL AVERY: GNU needs to do whatever it takes for a sustained revival

“SA has turned a corner,” read S&P Global Ratings’ recent assessment of the country’s economic outlook, upgraded from stable to positive. For a nation grappling with the sort of self-doubt brought on by nearly two decades of sluggish growth, stubborn inflation and ANC-led corruption, this is more than just a pat on the back; it raises an existential question. It’s only natural then that as we celebrate this hard-won progress the question that gnaws away is whether this is the start of a sustained recovery, or merely a momentary reprieve. 

The dollar’s surge, which has found muscular reinvigoration in Donald Trump’s protectionist rhetoric and a recalibration of Federal Reserve rate cut expectations, has only added a fresh layer of complexity.

Since the US election on November 5 the rand has depreciated by 5.2% against the dollar, hitting its lowest point in three months and driving a widespread downturn in emerging-market currencies. This has erased most of the rand’s year-to-date gains. Despite this setback, our beloved rattler remains one of only three emerging-market currencies to still post gains against the dollar this year, with a modest increase of 0.6%. 

The SA Reserve Bank is expected to lower the repo rate by another 25 basis points (bps) on Thursday, following a similar move in September. This monetary easing aims to bolster economic growth, but the strengthening dollar and its implications for capital flows and inflation may complicate what would otherwise seem like a straightforward decision. 

Paul Volcker, the iconic Fed chair who tamed US inflation in the 1980s, famously said: “The art of central banking is judgment — deciding when to step on the brake and when to ease up on the gas.” The Reserve Bank now faces a similar judgment call. Inflation has eased to levels not seen in years, with October’s consumer price index (CPI) projected at 3.3%, well within the Bank’s 3%-6% target range. Sustained fuel price cuts have offered further relief to consumers, and the economic environment is ripe for policy easing. 

But Trump’s return to the White House has reignited the fear of trade wars and protectionist policies, which could disrupt global supply chains and dampen demand for SA exports. A stronger dollar also puts pressure on emerging market currencies, including the rand, raising the spectre of imported inflation. While the Bank’s anticipated rate cut signals confidence in the domestic economy, external risks could quickly force the central bank to reassess. 

In upgrading SA’s outlook to positive, ratings agency S&P noted the government of national unity’s (GNU) reform momentum and improved fiscal predictability. Bond yields have fallen, foreign inflows have increased — but only marginally — and the rand enjoyed a period of relative strength — until Trump’s re-election.

Consumers, often overlooked in macroeconomic debates, have played a critical role in SA’s tentative recovery. Real incomes have improved, fuelled by declining inflation. Retailers, buoyed by better electricity supply and improved sentiment, are reporting stronger sales. The two-pot retirement reform, which allows savers to access a portion of their funds, has added a further liquidity boost to household spending. 

While these short-term gains are welcome, they do not address the structural challenges that still constrain the economy. Persistent unemployment, skills mismatches and weak investment in infrastructure remain formidable barriers to long-term growth.

Political stability has provided a platform for accelerated reform, but the GNU’s ability to deliver on its promises remains untested. An about-turn on how state-owned enterprise (SOE) reform should be structured, pivoting away from the Singaporean Temasek model towards the Chinese model, is a case in point. You can bet your last bitcoin that no serious private investor will touch an SA SOE where government remains a controlling shareholder.

These are the pressure points that could unravel the coalition’s fragile consensus. And all the while a stronger dollar makes dollar-denominated assets more attractive, increasing capital outflows from emerging markets. For SA, this could offset some gains made in reducing its risk premium. 

In addition, Trump’s protectionist agenda could dampen global trade flows, undermining demand for SA’s commodity exports. The country’s recovery is highly dependent on global demand, and any disruption to trade flows would have direct implications for GDP growth and fiscal stability. 

On the fiscal front, progress isn’t perfection. The medium-term budget policy statement revealed weaker fiscal projections, underscoring how precarious SA’s position remains. The Treasury’s reliance on one-off revenue sources such as the Gold & Foreign Exchange Contingency Reserve Account raises concerns about sustainability. For now though, the GNU’s collaborative approach to fiscal and structural reforms has bought the government critical breathing room. 

The anticipated rate cut, the GNU’s reform agenda and the resilience of SA consumers all point to a country moving in the right direction. However, this must be accompanied by accelerated structural reforms. Transport and logistics and water remain crippled by inefficiencies eroding our competitiveness.

Referring to saving the eurozone, former European Central Bank president Mario Draghi famously said: “Whatever it takes.” That sentiment applies equally to SA’s current predicament. The Reserve Bank and GNU must adopt a similarly resolute approach. 

This is SA’s moment to prove that optimism is not misplaced. Can we turn a fragile recovery into a lasting renaissance?   

• Avery, a financial journalist and broadcaster, produces BDTV's Business Watch. Contact him at Badger@businesslive.co.za.