23 Sep Is The Rand Headed For Another Crash?
Is The Rand Headed For Another Crash?
With South Africa moving to level 2 lockdown restrictions and infection rates dropping by the day, many are elated for the positive impact this would have on business and hard hit industries.
But many experts warn that we should not count our chickens before they’ve hatched and should maintain a medium to long term view if we’re to stay one step ahead.
Which factors should be considered?
There are numerous factors which impact the resilience of the South African economy and currency, and not all of them are close to home. Rand Rescue takes a look at some of these.
US monetary policy
In a white paper by SA-TIED (South Africa – Towards Inclusive Economic Development), Aluncedo Ntshuntsha sought to examine the influence of US monetary policy on the South African economy.
The studies and analysis undertaken indicate that US interest rates affect SA’s GDP in an asymmetric and non-linear fashion. The implication being that although there is a negative relationship between US interest rates and SA’s GDP for a specific and determined period, US monetary policy has long-term implications for SA as it affects the rate of our GDP growth and/or contraction. Conversely, US investment in SA seems to have limited positive impact in the short term, and effects are only visible over the long term – provided they are likewise sustained and not dithering.
The all-share index also has a long-term negative impact on SA’s GDP. This comes down to frequent share price changes and regular exchange, while the Federal Reserve seems to be systematically raising its benchmark interest rates. This has led to capital outflows and asset depreciation in South Africa and other emerging market economies.
John Cairns from Rand Merchant Bank explained that trends have shown that each time the Fed has cut rates, the US economy slows sharply, and while the cuts have a positive effect on SA’s economy in the short term, it always ‘blows out’ three to 12 months after such cuts.
In essence – while South Africa relies on the US for loans, investments and exports (to an extent), our reliance is too great and the ball remains indefinitely in the US court. Even minor changes in US monetary policy trigger negative GDP growth locally. In many instances, this yields a scenario where we import more than we export, and while fed cuts are positive for the Rand in the short run, these positive bursts hold fairly little long-term benefits as the marginal economic infusion is not sufficient to ensure long-term catchup. By the time the US economy is assured that economic growth has been internally stimulated and raises interest rates once more, South Africa is still playing catchup.
When the fed cuts, the rand gains on average 5% in the two months following such cut, which gives the general perception that the fed therefore has a positive effect on SA’s economy. However, negative growth in the US economy is generally felt in SA’s pocket around 12 months after such event. This also generally aligns to the US economy stabilising, at which time the world once more favours the dollar.
And while interest rates have been low this past year, it is important to note that the US has raised interest rates 9 times from 2016 to 2019.
While SA capitalises on the current US economic slowdown, it is important to take a longer term view to determine how matters will look in the next 12 to 24 months.
It’s also important to factor in the monetary policies of other world economies – especially those with whom SA has trade deals, and to whom we owe money. The same analysis and forecasting undertaken with the US is therefore necessary to assess SA’s economic future within a global context, as a result of global factors and within distinct relations we have with all respective economies.
South African debt
Although South Africa can certainly benefit from interest rate cuts to deal with our debt, the unfortunate fact is that our debt clock is accelerating and current projections indicate that it will only reach a plateau in 2026-27 before it will start contracting.
These projections by international analysts fall somewhere in the middle of the two scenarios painted by the SARB in SA’s 2020 Supplementary Budget Review. The two scenarios catered for is an active scenario, where South Africa implements major reforms and fiscal consolidation to rapidly stabilise debt by 2023/24, and a passive scenario where SA continues on our current trajectory, but our debt spins out of control and cuts drastically into our public spending.
SA’s debt forecast from 2020 Supplementary budget review with marginal correction for 2020/21.
The compound effect, of course, is that the rising debt in addition to other initiatives such as tax cuts increasingly cut into the state budget, leaving less funds for education, employment, health, infrastructure development and other crucial projects which had already lagged behind. With more than 1 million jobs lost in the past year and lockdown having had a detrimental impact on education, tourism and other industries (as well as businesses within the distinct sectors), we are bound to see a dramatic rise in people entering welfare or moving to lower income groups. Without the necessary funding to cushion this blow, the problem is bound to snowball indefinitely.
We knew, of course, that the R500-billion Covid stimulus package would come back to haunt us, but there’s no real way to criticise President Ramaphosa for the ‘go big or go home’ stance.
The events that transpired in the past year and three quarters weren’t on the radar of any risk assessment tools and the widely divergent strategies implemented by global leaders cannot be suitably equated to offer us many valid comparisons. On a normal day sans pandemic it is already hard to compare SA’s economic policies and growth to that of other emerging economies, let alone the economic powerhouses of the world. So while it is important to remain critical of the exorbitant measures taken in SA, it’s also not possible to criticise these against a valid antithesis. What outcomes may have presented had we aimed to limit our debt and lifted lockdown restrictions earlier is anyone’s guess.
Criticism which can, however, be dished out without reserve is the rampant corruption which has spilled over into Covid relief efforts. The writing was on the wall.
When one merely considers SOEs such as the SABC, Eskom, ARMSCOR, SAA, Transnet and so forth, it’s no surprise that so many fingers have been caught in the cookie jar of the Covid relief fund. If our country hasn’t managed to rectify the dire state of our SOEs whose expenditures have been under scrutiny over so many years, how were we planning on regulating the haemorrhaging of funds which needed to be made available immediately?
Consider, for instance, that for the 2019/2020 period the Net cash inflow from SOE operations stood at R67,3 billion while the Net outflow (including capital expenditure, interest payments and debt principal repayments) for the same stood at R144,9 billion. The average profitability of such parastatals, even before the pandemic, was -7.9%.
The National Treasury’s debt maturity profile for the seven largest SOEs indicate that we are only likely to see such debt start to dwindle from 2029/30 after peaking in the 2028/29 fiscal period. And such a scenario would only be possible through major expedited financial reform and private sector participation. Most crucially, these projections were envisioned by former Minister of Finance, Tito Mboweni, who had a far more radical stance on SOE reform than his successor. The aim was to systematically lower borrowing requirements for 7 major SOEs from an estimated R62,8 billion per annum to R37,0 billion per annum.
It is for this very reason that SA struggled to secure loans from financiers such as the IMF prior to 2020. Transparency International had been the first to raise the alarm when the stimulus package was announced, warning that SA simply does not have the capacity to oversee the allocation of such funds.
New stories of fund misappropriation seem to break on the daily, ranging from the disbursement of relief funds to procurement of PPE and other Covid essentials. In September 2020, the Auditor General released a statement indicating that they’d already identified significant problems in the allocation of funds. Auditing reports since have echoed these findings, including:
– overpayment of benefits
– misallocation of benefits
– premature approval of benefit payments
– inaccurate record keeping for relief funds
– unfair allocation of relief funds
– vague or inadequate criteria used for vetting beneficiaries
– inappropriate awarding of tenders to manufacturers and service providers
– high incidence of damaged or sub-par goods sourced and distributed
– no auditing protocols in place for third-party service providers
– unreliable or erroneous algorithms applied for calculations
– service delays due to inadequate or understocked suppliers
– price fixing and price hikes for essential items
– use of unregistered or non-compliant service providers
– conflicts of interest in rewarding tenders
– delays in government payments to suppliers
– delays or non-delivery of essential hospital equipment
– non-compliance with legislative requirements
– non-payment of temporary staff
By September 2020, 1 513 beneficiaries of social grants had been found to be directors of companies with government contracts while up to a third of grants were rejected – many of these to valid recipients. Additionally, many beneficiaries of certain relief funds had applied for relief from other funds and benefitted from multiple sources of income.
As of December, more than R5 billion awarded to 658 government contracts had been under active investigation for impropriety, and this number has continued to grow exponentially since. At the same time, it was identified that an estimated R3,4 billion in UIF/Ters benefits may have been incorrectly disbursed.
An updated report released in June 2021 indicated that 64% of municipalities have been flagged for irregularities in recordkeeping, outsourcing responsibilities and managing third party contractors. The report further noted that only 28% of municipalities were able to submit financial statements suitable for auditing even though the cost of financial reporting had already soared to R5 billion for salaries within these financial departments alone (an estimated 18% of costs allocated). In many instances municipalities continue to outsource such tasks to external consultants even though a review of their finance units indicate that they are sufficiently capacitated – this either points towards individuals appointed in these roles not having the skills they were appointed for, or those individuals not fulfilling their roles suitably. Many municipalities have been under administration for a significant amount of time, and yet despite this administration still received disclaimed opinions as of 4 June 2021.
To further compound matters, the report indicated that the performance of municipalities have degraded even more than their financial reporting with less than 25% being able to provide quality performance reports linked to poor service delivery. Auditor General Tsakani Maluleke noted that 86% of municipalities were found to be non-compliant with legislation and reported material non-compliance. This added up to irregular expenditure of R26 billion in non-compliance with supply chain management legislation alone. At year-end, the cumulative amount of irregular expenditure which had not been dealt with stood at R77,22 billion, with R1,43 billion of this linked to procurement contracts which could not be audited.
By 11 June 2021 the AG had issued 96 notifications of material irregularities against municipalities, with 75 of those irregularities amounting to an estimated loss of R2,06 billion. The only province to show good financial accounting controls was the Western Cape, with only two – Limpopo and the Northern Cape – showing noteworthy improvement. The North West is fairing the worst, with the AG labelling it a complete financial and operational collapse.
Where to from here?
The world is likely to see a slowdown in Covid-19 infections and a systematic recovery of economies as borders open for business and leaders can shift their focus from crisis to rehabilitation. But a post-pandemic world does not automatically signify a bounce-back for South Africa.
As things slowly return to normal there will be a definite need to not only account for the losses and debts incurred, but to seek practical and punctual strategies for recovering such losses. Our track record for holding corrupt parties to account is not that great. For the most part such undertakings usually lead to exorbitant amounts spent on auditing, enquiries and legal fees to pinpoint delinquents and quantify losses while the lost funds had long since evaporated into the ether.
Unless our leaders implement drastic reforms and put resolute legal interventions in place which could hold wrongdoers to account, our efforts to weed out corruption and stabilise the economy will be in vain.
Throwing in the towel may be the easy choice when it comes to paltry tasks, but when it comes to one’s residency it’s undoubtedly one of the hardest things to do. Most of us would like to hold out and wait for the silver lining to manifest – we don’t want to uproot our families, abandon our heritage or give up on those dreams we’ve carefully woven into the tapestry of our local landscape.
Hard choices are necessary where sustained economic freedom and prosperity become untenable. It is not just realistic to envision various trajectories and outcomes based on the data at hand, but also prudent to do so. There is, of course, nothing wrong with choosing to stay put and wait out the storm with an auspicious prognosis for our country’s future, but choosing to cash in and check out should not stain one with the scarlet letter of abandonment so often bestowed on emigrants. The stigma linked to staying or leaving (whichever applies) is only effective in polarising a society already divided on too many other fronts.
If you’ve crunched the numbers and decided to hedge your bets on foreign shores, be sure to chat to Rand Rescue about your financial needs and options. We can advise on the best route for your cross-border financial portfolio and facilitate many of those tricky tax and administrative tasks on your behalf.
Simply leave your details and we’ll get back to you.
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