The South African Reserve Bank raised interest rates by 50 basis points, and economists such as Stanlib’s Kevin Lings expect more to come. He predicts at the very least an extra 75 basis points by the end of the year. By his own admission, Matthew Lester is not an economist but he fears for the direction South Africa is heading.
He sees increased rates as a default call, and wonders if economists have failed to come up with an alternative. He’s concerned that most of South Africa has been pushed to the brink and this is just another nudge. He’s pinning his hopes, as are many others, on Finance Minister Pravin Gordhan for some rearguard action at the budget speech next month to reverse the course. – Stuart Lowman
By Matthew Lester*
Few economists will question the wisdom of the Reserve Bank's 50 basis point increase announced on Thursday 28 January 2016. The increase came as no surprise. All the key indicators were that the intervention is necessary. In fact most dealing rooms had already priced the announcement into their decisions.
But I am not an economist. Yet I fear for the direction that SA is taking.
Accepted economic theory is that economic difficulties can be addressed with interest rate adjustments. But is this not a default call? Is it not simply that economists have failed to come up with an alternative?
In the lead up to Thursday's announcement the ANC’s Gwede Mantashe was out there saying that the interest rate increase was necessary to save SA from a downgrade to junk status. So it would appear that SA is managed in fear of the few suits at the rating agencies rather than in fear of the effects on 54 million South Africans?
Albert Einstein said ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’
Applying these simple words the very few South Africans who are cash positive received good news on Thursday afternoon. But the majority will have to pay a heavy price. Let alone the effects of higher interest rates strangling the economy.
So Einstein’s words are simply reinforcement of the worldwide fact that the rich just get richer while the poor just get poorer.
We all need to remember that interest rate interventions can be disastrous. We easily forget the disasters of the 1980s caused by Reagan and Thatcher when following their guru Milton Friedman. SA did much the same with Dr Chris Stals at the helm of the Reserve Bank.
My questions are ‘despite the interest rate increase being based on sound economic theory, is it sustainable? What about the issue of inequality in SA with a Gini coefficient of .59?’.
Research conducted by economist Murray Leibrand shows that in 1948 at the dawn of apartheid the top 1% of SA income earners obtained 22% of the national income; by 1975 this figure had declined to 10%. Now, 20 years after the death of apartheid, it had climbed back to almost 20%.
Over the past festive season the top 1% seemed unaffected by SA’s economic problems. Their cars were just bigger than last year. They drank just as much and spent hundreds of thousands on frivolous fireworks wars over new year.
Life is great if you are in the top 1%. And when they get bored they can always blame their lousy lot on JZ. This is the very lot that scored off the interest rate increase. Along with some pensioners, that is.
How can this be?
Now that the holidays are over a different picture emerges. Tax collections measured to November are off track. If December and January figures reflect this disturbing trend we are in for the mother of all budget announcements.
Add to the question of corporate tax collections for the 2016/17 tax year that may well be hammered by forex losses sustained in the December blood bath. Yet every SA business seems to think that it is their God-given right to smack on a 10% increase across the board, with fuel price and tax increases yet to come in April.
Wake up and smell the roses. #feesmustfall is not, as many think, just a bunch of protesting students confined to issues of student fees. Perhaps what started with a turd been thrown at a statue is potentially the start of a social uprising the size of which SA’s leaders never anticipated and are incapable of handling. Yes, a spring uprising is possible in SA.
Most of SA has been pushed to the brink. And the Reserve Bank has failed to recognise just that on Thursday.
There can be little doubt that the state of the nation address will pay lip service to these issues. We can only hope that Finance Minister Pravin Gordhan can come up with a cracker of a National Budget Speech on 24 February.
*Rhodes University Professor Matthew Lester was educated at St Johns College, Wits and Rhodes universities. He is a chartered accountant who has worked at Deloitte, SARS and BDO Spencer Steward. A member of the Davis Tax Committee investigating the structure of aspects of the RSA tax system, he is based in Grahamstown.