Glacier Quarterly 4 - 2018

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INVESTMENT INSIGHTS • An inverse correlation exists between interest rates and economic growth, with the restrictive monetary policy stance since 2014 having been accompanied by a declining GDP growth trend • There is no consistency in the approach towards monetary policy. Ever since the departure of Gill Marcus, the previous Governor of the Reserve Bank, a shift has occurred from an alignment with the nearuniversal trend for accommodating monetary policy to a restrictive one • From 2012 to 2014, the real prime rate averaged 3%. Since then, it’s increased to just below 5%, representing an increase in debt service costs (at prime rate) of 64% • Since December 2016, CPI has declined by 190 basis points, while the repo rate has only been lowered by 50 basis points. This means the Reserve Bank is 140 basis points behind the curve • When inflation targeting was officially adopted 18 years ago, it was never the intention to fix the chosen target range of 3% to 6%, but to consider future adjustments, depending on the overall state of the economy. It should be abundantly clear that the policy objectives of job creation and growth currently far outweigh the need for further reductions of a relatively stable and low inflation rate. At no point in South Africa’s modern history has there been such an urgent need to shift the economic policy emphasis to higher growth and employment creation. The country is still experiencing low levels of confidence caused by the lingering effects of state capture, large-scale corruption and public sector mismanagement that occurred under the Zuma administration, while job growth is lethargic. Growing GROWING gap since GAP 2015 SINCE between 2015 real GDP BETWEEN growth & REAL the real GDP prime GROWTH rate & THE REAL (Sources: Stats PRIME SA; own calculations) RATE 6 % Note: Year-on-year GDP growth rates 5 4 Real prime rate 3 2 GDP growth rate 1 0 Q2'12 4 Q2'13 4 Q2'14 4 Q2'15 4 Q2'16 4 Q2'17 4 Q2'18 -1 (Sources: Stats SA; own calculations) 16
Rising unemployment creates a fertile breeding ground for elevating the already high level of civil unrest in the country, a phenomenon that plays into the hands of radically minded organisations. This further hampers the country’s ability to expand productive capacity and attract foreign direct investment. Against this background, the MPC’s dogged insistence on keeping interest rates high remains a mystery. Inflation is low and relatively stable, while South Africa’s future growth prospects have improved on a structural basis as a result of the new-found pragmatism of President Cyril Ramaphosa. Corruption is now being laid bare, with a view to establishing sound standards of corporate governance in the public sector, while closer cooperation is being established with the private sector in an attempt to reduce policy uncertainty. Hopefully, these efforts will assist in identifying and removing obstacles to higher growth and employment creation. The early stage of the Ramaphosa era has also provided South Africa with a huge dividend in the form of the country’s sovereign bonds retaining investment-grade status and Moody’s Investor Services upgrading the outlook from negative to stable. Unfortunately, the leeway for significant short-term fiscal stimulation remains constrained by slow taxation revenue growth. The other key policy option, namely accommodating monetary policy, remains available, but is in limbo. The case for stimulating the economy via lower interest rates is compelling. If 50% of holders of total private sector credit lower their monthly repayments in response to a one percentage drop in the prime rate, it will unleash more than R17 billion of demand via increased capital formation and household consumption expenditure. This could ultimately create more than 200 000 jobs and significantly broaden the tax base (based on the ratio of GDP to total employment and input/output table multipliers). The current monetary policy stance of the Reserve Bank is akin to selfinflicted economic sanctions. It’s time to deal decisively with South Africa’s most pressing economic policy priority, namely higher growth and employment creation. Lower interest rates will facilitate this. Dr Roelof Botha, Adjunct Faculty, GIBS (University of Pretoria) 17
Page 1: GLACIER QUARTERLY NOVEMBER 2018 QUA
Page 4 and 5: INVESTMENTS Finding balance in a wo
Page 6 and 7: INVESTMENTS We as South Africans so
Page 8 and 9: INVESTMENTS words, a diversified po
Page 10 and 11: INVESTMENTS EQUITIES: is it time to
Page 12 and 13: INVESTMENTS There’s a saying in f
Page 14 and 15: 12
Page 16 and 17: INVESTMENT INSIGHTS URGENT NEED for
Page 20 and 21: SA 2019 STICK AROUND: SA turnaround
Page 22 and 23: SA 2019 campaigning, we’re probab
Page 24 and 25: SCENARIO PLANNING Breaking the late
Page 26 and 27: SCENARIO PLANNING Quality of Infras
Page 28 and 29: TRENDS SOUTH AFRICA 2019: investing
Page 30 and 31: economic growth stagnates - perhaps
Page 32: The information in this document is

Glacier Quarterly 4 - 2018

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