LETTER: Focus on long-term goals

The violence of the past week is deplorable, not only in terms of the tragic loss of life, property and vital infrastructure but also because the longer-term economic impact of this destruction will hurt the poor most.

Regardless of the immediate triggers of this violence, these tragic and damaging events undoubtedly have their origin in 12 years of weak economic growth, increased unemployment and growing inequality. This vicious cycle has fuelled a culture of despair in which many in our country, utterly excluded and without any stake in the system, feel they have little to lose.

Despite the fear and confusion gripping the country, now is not the time to succumb to despair, nor to be panicked into making rash decisions that could damage our democracy and collective futures. In fact, now is the time to maintain an even keel as we remain focused on our longer-term goals as a society, a young democracy and a growing economy.

As such, and despite the obvious immediate economic impact of the violence on growth and inflation, I am not changing any of my forecasts just yet. Since current events present definite downside risks to growth, my GDP forecasts may need to be adjusted from 5.5% back down to 5%. Once the violence abates, rebuilding and restocking of ravaged infrastructure and supplies should support a short-term increase in economic activity.

While supply side interruptions may drive inflation in some sectors over the short term, we do not expect this to impact longer-term inflation trajectories. So, while our current 4% CPI average inflation forecast might have to be revised a touch upwards, we will not make any rash decisions. Instead, we will wait and reassess once the situation calms down.

As investment professionals we have a responsibility to look through the noise and emotion, recognising that even in the past few days we have come a long way towards establishing calm and gaining clarity on the drivers of these tragic events. Moreover, the rule of law remains supreme in SA, and other structural positives remain in place. These are not about to disappear overnight. Thus, even though investor confidence will be damaged, our medium-term outlook remains unchanged.

Looking ahead, however, much remains to be done in terms of sustaining and deepening structural policy reforms. We do not believe recent events will derail this plan. In fact, just the opposite. Bold and significant economic reform is the only way to meaningfully address the economic exclusion and alienation behind this tragic and costly violence.

We hope one silver lining to emerge from this tragedy will be a renewed commitment and far greater urgency from the Ramaphosa administration for market and investment-positive reform. This commitment should be coupled with a clear disavowal of the damaging radical economic transformation rhetoric that has not only sown the seeds of the violence but is also largely responsible for the weak growth that has seen so many of our people excluded from our economy.

Johann Els
Chief economist, Old Mutual Investment Group

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