By Thabile Wonci
JOHANNESBURG – The recent downgrade of South Africa’s sovereign credit rating by Moody’s and S&P Ratings to junk status, a country whose economy is currently in recession and anguished by the scourge of Covid-19, has driven South Africa into a state of economic paralysis.
It appears that the fundamentals that characterised much of the world economy during the 1930s are staging a dramatic comeback for South Africa today.
Have we just entered an epoch of depression economics?
I doubt there’s anybody who thought six months ago that our economy would suffer this triple blow in one quarter in a form of recession, sovereign downgrade into junk and Covid-19 pandemic.
Unfortunately, this year started on a negative note for South Africa with the World Bank and International Monetary Fund cutting its growth prospects down from 1.5percent to 0.9percent and 1.1percent to 0.8percent, respectively.
Bear in mind that these revised numbers exclude the impact that Covid-19 and junk status will have on the economy. Both institutions cited persistent policy uncertainty, constrained fiscal space, subdued business confidence, weakening external demand and electricity supply challenges.
Evidently, South Africa’s economic failures on the demand side of the economy have become its limitations for the much desired economic growth and development. The time has come for South Africa to use its monetary policy to get the economy out of its current quagmire. It is comforting to know that South Africa and its people share similar characteristics with the aloe ferox as alluded to by Finance Minister Tito Mboweni during his 2020 Budget Speech early this year when he said that, “the aloe ferox survives and thrives when times are tough”.
However, to deal effectively with the current economic slump and the imminent impact of Covid-19, South Africa and its people must adopt the unwavering courage and determination shown by the former President of the European Central Bank (ECB), Mario Draghi in July 2012 when he said “we will do whatever it takes” to preserve the euro.
This was a watershed moment for Draghi and ECB and the end result was the restoration of financial confidence and ending the sovereign debt crisis through extraordinary measures that supported European’s governments and banks. This is one of the too many examples where monetary policy was used by a central bank to kickstart the economy.
The severe and most destructive risk that South Africa’s economy is faced with, is the deepening of the economic downturn which will lead to more job losses, the serious recession that can take years to undo.
For South Africa to see meaningful economic reforms, we need to find answers for the present challenges that the country is faced with. We must resist the temptation to attribute all our economic ills to the prevailing economic structure in the country. In truth, not all major problems are structural. The relief measures announced by the South African Reserve
Bank to provide lenience on capital adequacy and liquidity ratios will not generate the needed economic recovery.
Quantitative easing and low interest rates are proving to be exceptional measures that central banks globally are using to kick start the ailing economies in recession and with high unemployment numbers. Large scale asset purchases make a good case in lowering terms and risk premiums thus increasing asset prices and boosting aggregate demand.
These measures have a positive macroeconomic effect such as increased output and employment. The Eurozone and Japan have done this successfully many times in the past thus making a case that conventional monetary policies have proven to be less effective.
In addition, quantitative easing will help South Africa avert going to the International Monetary Fund or World Bank for a bailout to deal with Covid-19 and the current economic downturn. Our country has a robust and resilient financial system whose strength was tested during the global economic meltdown in 2008. Our policymakers must draw strength and courage from this fact.
However, Donald Kohn, a notable expert in monetary policy, argues that quantitative easing raises serious issues of governance and accountability for independent central banks that must be acknowledged and discussed if public and legislative support for central banks independence in the conduct of monetary policy is to be maintained.
A non-conventional policy approach such as quantitative easing is appealing not because it offers easy answers, but it might be the stimulant that South Africa needs today. By not doing “whatever it takes” now in the short run to fix the economy, as John Maynard Keynes said, “in the long run we’re all dead”.
Thabile Wonci is the chief executive at Kogae Rainbow Investment Holdings and a senior partner at Kogae Advisory Partners.
