Macro economic commentary – April 2019

Author: Ntsekhe Moiloa |

It is sometimes said that events have overtaken a certain circumstance. That is true in politics or even in law. For instance, the forgotten existence of a miscegenation statute might have been overtaken by the current normality of inter-ethnic marriage. Or who can forget the episode when a German comedian used what he thought was his right to satirise public figures, making (crude) fun of the Turkish leader, Recep Tayyip Erdoğan, and finding himself at risk of prosecution under a German law dating back to the early 1900s. In matters of the economy, as investors we are at risk that our impressions are overtaken by the present.

The present in Portugal is an economy that has matured quite a bit compared to our memory of a decade ago. Along with other southern European countries – and especially Greece – Portugal was thought to be staring down an economic abyss. Like Greece, corruption was alleged and inefficiency was widely noted. Yet where it used to take nearly a month to register a Portuguese business, today the feat can be accomplished in under five days. The Portuguese economy has been reanimated to the point that the unemployment rate is as low as it was 15 years ago. Underinvestment in public infrastructure remains a challenge, however, while Italy continues to wrestle with Brussels over the size of its fiscal deficits, Portugal has balanced its import-export account by presenting itself with an even bigger smile in the tourism sector.

As South Africa moves to elections in May and some headlines suggest that it is one of the world’s most politically populist countries, it might be hard to imagine that just as Portugal had faced an economic Goliath and won, so might South Africa. Portugal has no natural resources but found a way to resume meaningful growth. In December 2018 the IMF published a blog piece encouraging sub-Saharan Africa countries to reduce their dependencies on resource-led economic growth. The institution wrote that the region suffered considerably from the commodity price shock of 2014, and that the less resource-intensive economies have rebounded faster. Might the case of Portugal be an interesting example for South Africa?

For about 50 years from 1926, Portugal fell first under the “Ditadura Militar” and then the “Ditadura Nacional”. In effect Portugal was ruled in a corporatist authoritarian frame of governance for the most part under António de Oliveira Salazar. This period between 1926 and 1974 is sometimes also known as the Portuguese Second Republic. Although Brazil was no longer part of the Portuguese Empire when the Second Republic was in place, as the largest single Portuguese-speaking country the political impulses of Portugal were probably not far from mind. Indeed earlier in Brazilian history there was a period of 15 years during which the Portuguese king had run his Empire from Rio de Janeiro, and when he left, a son who remained eventually became the first Brazilian monarch in the early part of the 1800s. The effects of Empire in Brazil ran deep so that by the 1900s when the Brazilian Marxist thinker Leôncio Basbaum said that, “capitalism is not a regime instituted by Divine Providence for eternity, but only an episode in the social development of humanity,” he was expressing a disenchantment with capitalism that resonated with many Marxist impulses up and down Latin and South America in the 1900s. From Mexico across to Cuba, through Colombia, Nicaragua, Chile, Peru, Brazil and Argentina, leftist ideology has held significant appeal in Spanish and Portuguese ex-colonies. Thus, when the Great Financial Crisis roiled Portugal a decade ago, Portuguese society had its own history and a vicarious Brazilian experience to tempt it towards anti-capitalism.

As South Africa has become, Portugal had the opportunity to succumb to a decidedly populist approach to politics. The 2018 Democracy Index produced by The Economist lists Portugal as the 28th highest scoring democracy with South Africa ranking at 40. Yet together, Portugal and South Africa are considered flawed democracies rather than full democracies meaning that while elections are free there may be weaknesses such as an underdeveloped political culture. As with South Africa’s lost decade, Portugal lived through nearly four decades of government mismanagement. To arrive in 2019 where the IMF is praising Portugal’s fiscal management, the Portuguese had to accept a few polished stones from the EU and the IMF to slay Goliath. The EU bailout mechanism came with conditions including market access and labour legislation reform. The question is whether South Africa might have to go to the IMF for a similar dose of medicine? The answer is not crystal clear, yet on the final day of April the truth on the ground was revealed which is that South Africa’s main budget deficit at the end of March was ZAR 14 billion worse than anticipated. The underperformance amounted to about 0.3 percent of GDP, and was largely on the back of revenue underperformance rather than greater than anticipated expenditure. The plain picture is that the economy is underwhelming even moderated expectations. Compounding the problem are known challenges at state-owned entities that are inhibiting investment into public infrastructure. Under similar pressures Portugal sought a bailout which incidentally has enabled the country only to address current spending needs but not longer-term infrastructure investment.

We have not seen stress in the ability of the South African government to raise funding from its domestic, weekly auctions. The National Treasury has stated that the money it raises offshore is used exclusively for its offshore needs and those are relatively limited. Thus far, there is no indication that South Africa would not be able to raise offshore funding if it needed to do so. That did not stop speculation around the end of 2018 and beginning of 2019 that external, multilateral support might be needed. The period of global easy money away from the clutches of the IMF appeared to be drawing to an end until around the beginning of the year when the US Fed first signalled that it might hold back on further interest rate hikes. For South Africa that represents a reprieve as rising US bond yields risked putting upward yield pressure on emerging market bonds.

After years of easy money, the prospect of higher US inflation has resurfaced. However, the components of US inflation that have buoyed the headline figure have been unusual in the sense that they are acyclical and temporary such as telecommunications and medicines. That presents a headache for monetary policy because acyclicality implies that they are more immune to adjustments in interest rates that are intended to influence consumption behavior.

A few years ago, the US Fed left some investors aghast, raising rates as it looked as if significant regions like Europe were set to slow down. Accusations were made that the US central bank had been too slow to begin normalisation and now was set to raise rates at a time when standing pat would be more supportive of the global economy. What we have seen over the past few months is a Fed that has once again become an international central bank, responding more to global concerns than domestic ones. It has paused its hiking cycle since December, leaving the policy rate close enough to 2.5 percent that there is wiggle room if rates need to be slashed again. At this stage it is not the US economy that looks in need of the support, hence the suggestion that the US Fed has become a more internationally-minded economic manager.