EDITORIAL: Don’t be tempted to spend that large revenue windfall

SA goes into its medium-term budget later this month amid expectations that the commodity price boom will have generated a large revenue windfall for the government, which will see the deficit and debt ratios looking better than expected in February and much better than expected a year ago.         

The temptation is to spend it. And with the cost of living rising, economic growth slowing and households and businesses taking strain, the temptation will be to spend it on short-term relief of one sort or another. But anyone watching the gatherings in Washington DC this week will be sharply reminded that SA needs to be very careful not to squander its windfall gains. It has to be careful too to continue keeping a lid on inflation.  

That’s because the global environment is a risky and unpredictable one. And, as the IMF has urged, SA and all countries need to batten down the hatches amid the storm.

Inflation is now the dominant concern globally. After more than a decade of ultra-low interest rates, advanced countries led by the US are raising rates sharply. The effects are rippling across global markets and the global economy. And with nobody expecting inflation and interest rates to come down again any time so, nobody really knows quite how this new world of higher rates and a strong dollar will play out. What is clear though is that global growth will be lower — perhaps in recession territory — and markets volatile.

The IMF’s latest World Economic Outlook paints a bleak picture. The fund’s economists now expect global growth to slide from 3.2% this year to 2.7% next year, with countries accounting for a third of the global economy expected to contract this year or next. The world’s three largest economies — the US, China and the euro area — will continue to stall, the IMF’s head of research, Pierre Olivier Gourinchas, said at the launch of the report in Washington on Tuesday. “The worst is yet to come and for many people 2023 will feel like a recession.”

Inflation is seen as the world’s biggest macroeconomic challenge now. Hikes in the cost of living are causing hardship for households. But they have also prompted the central banks of advanced economies in the US and Europe belatedly to hike interest rates steeply to try prevent inflation, which is proving more persistent and profound than they had anticipated. The impact of the US Federal Reserve and other central banks’ rate hikes has been to reverse more than a decade of ultra-easy monetary policy — and the result has been to throw global financial markets into a constant spin as assets reprice everywhere in light of the new world of high inflation and interest rates. Borrowing costs have risen. Capital has flowed out of emerging markets and indeed out of risky assets generally and into safe-haven assets such as the dollar, which is stronger than at any time since the early 2000s.

Poverty has risen to levels significantly higher than would have been expected before the Covid pandemic. Many millions of people in Africa are facing food insecurity. And Russia’s invasion of Ukraine has driven the price of many staple foods sky-high, which has hit low-income households and low-income countries hard given how much of their spending goes on food. Some countries, particularly vulnerable low-income ones, have gone into debt distress.

SA has over the past couple of years been cushioned by high commodity prices, which have aided its balance of payments and its public finances. But its economy cannot escape the impact of global recession and global financial turbulence. Slow growth in the economies of SA’s major trading partners will inevitably hurt its economic prospects — on top of the self-inflicted damage done by load-shedding and the strike and continual dysfunction at Transnet.

Tighter global financial market conditions have made it costlier for SA to borrow. And there are concerns that volatile global markets could become even more hostile. Certainly, as the UK’s disastrous venture into adventurous fiscal policies indicates, markets will hammer any country seen to be mismanaging its public finances. As the IMF has emphasised, monetary policy will work best to contain inflation if fiscal policy also comes to the party. For policymakers, it is a tough trade-off to be conservative about policy at a time when economic growth is so weak. But it can only get weaker if our policymakers are seen to be betting the bank on anything risky or unsustainable. If ever there was a time for prudent policies, this is it.