EDITORIAL: Economy skates on the thinnest ice as SA’s Russia romance continues

The Reserve Bank is not given to alarmist rhetoric, so when it lays out the potentially dire consequences for the economy and financial system of the government’s flirtation with Russia, its warnings should be taken seriously.

We can only hope Pretoria is listening. More likely, the ANC government is being swayed by the loony calls of some fringe economists for Bank governor Lesetja Kganyago and the entire monetary policy committee to resign.

Their crime? Hiking the repo rate by another 50 basis points last week — a move which failed to stem the run on the rand and has worsened the country’s growth outlook.

Economists are starkly divided on why the rand weakened further. Was the market (which expected a 75bp hike) disappointed that the Bank wasn’t hawkish enough? Or did it view the hike as too hawkish, a monetary policy error that will tip the economy into a recession?

A more interesting question is whether it means South Africa has reached the point at which further rate increases will not merely be futile, but actually counterproductive.

Certainly, there seems to be a growing realisation that the only way to get inflation down, and growth up, is for the government to repair the country’s basic fundamentals — from collapsing water and energy infrastructure to the teetering logistics system. While it’s at it, it should postpone the Brics summit indefinitely.

The headline the FM would have liked to see most this week was “SA cancels Brics summit; Putin denied visa”.

Instead, the summit will go ahead in August, but before that President Cyril Ramaphosa's administration will jump through hoops to ensure it sidesteps its International Criminal Court obligations. If Putin attends, President Cyril Ramaphosa will not be able to avoid being photographed shaking hands with his snake-eyed counterpart. Then just watch the rand run — over R20/$ looks more plausible by the day.

The Bank lays out the risks in no uncertain terms in its biannual Financial Stability Review (FSR) released this week.

While the overall financial system remains “resilient” for now, this is likely to be tested by even slower and more inequitable economic growth down the line, the Bank warns. South Africa’s greylisting by the Financial Action Task Force and interminable load-shedding are not helping.

Not only is systemic risk rising, but the Bank has added two new risks to the long list of things we already worry about: capital outflows and the risk of indirect sanctions being imposed on the country due to its stance on the Russia-Ukraine war.

The worst-case scenario sketched by the FSR is that local financial institutions could be locked out of the global financial system, unable to make international payments in dollars for imports such as oil, and that this could lead to a sudden stop in capital inflows and accelerated outflows. Economic growth would fall off a cliff.

Then there’s the risk that South Africa’s favourable access to the US market in terms of the African Growth & Opportunity Act may not be renewed when it expires in 2025. This will have “severe consequences” for industries which have benefited from the agreement since its inception in 2000, warns the FSR. 

But instead of taking these warnings to heart and changing tack, the government seems to be doubling down. And with monetary policy seemingly rendered impotent for now, it is up to ordinary citizens to exercise the only power that can bring about real change — the power of the vote.