Do you understand the game?

Posted in: Economics, i-Blog on August 2, 2020


We should be under no illusions: the Treasury is going to be back at the IMF in a few years for a fully fledged economic programme.

This column was first published in Business Day. 

There is a general sense of unease. Many people seem to know the country is headed in the wrong direction, yet there seems to be a misunderstanding of exactly what SA is right now which sets it on this path.

Put simply, SA is “any other emerging market”. All its history and innate exceptionalism count for nothing.

This no doubt sounds tough but when you expose yourself prostrate before the IMF, people start to take note. They look at risks in a slightly different way and make certain calculations — such as when the government might run out of cash or how the balance of payments adds up.

This latter issue has, alas, been subject to too much exceptionalism. It’s far too easy to say that all is fine given exchange controls, no forex loans to service up to your eyeballs like Turkey, and low levels of government forex debt, unlike much of Latin America. Yet that doesn’t mean you can’t have balance of payments problems. And the IMF staff report on the rapid financing instrument (RFI) loan that SA has drawn laid this bare.

The report showed a balance of payments gap of about $10.5bn — for which the $4.3bn RFI plugged part of the whole, alongside other funding from international financial institutions. Even with the current account balance around a surplus, if you don’t have foreign direct investment, if you have portfolio outflow (or highly volatile portfolio flows due in part to being rated junk) and if locals are sending money abroad then you can still have a balance of payments shock.

This in turn is deeply linked to the sustainability of the fiscus and the limits on what can be funded in the domestic capital markets, which again many have been too blasé about for too long.

The polity is not ready for what happens if you have a true crystallisation of such balance of payments risks. The only saviour then will be a very painful period of rand weakening and higher inflation. Very few people in policy-making circles consider this looming risk and why structural reforms are linked to it — the SA Reserve Bank yes, maybe a few in Treasury but that is it.

All this may seem obvious to many who read this publication. The point is, the government has now entered the room with the grown-ups.

Two things seemed to strike when the announcement of the RFI was made.

The first was “it will all be looted”. I was taken aback by the number of messages I received saying this from some surprising people. The government should not underestimate the loss of trust when corruption within the party is seen as foundational to its existence.

The other issue was the directness of the IMF’s language in the press release and then in the staff report. Like a scolding schoolteacher, even through the diplomatic language, it was clear what the IMF saw as necessary. The IMF writes yearly reports (its Article IV reports), which have for the past decade laid out the necessary reforms and analysed the continual fiscal slippage. There was a sense of weariness in the IMF’s tone that reforms would need to be presented at the medium-term budget policy statement to stick to the presented (active) debt profile — which one sensed it saw as unlikely to be achieved given all the downside risks it named.

One should not underestimate the harm that will be done to SA’s credibility if it veers off course and the IMF is there writing reports about its failings.

After some tough negotiations, the IMF had little choice in this crisis but to accept the active budget scenario. But one should be under no illusions — the Treasury is going to be back in a few years for a full programme after necessary reforms are not undertaken and balance of payments risks crystallise.

As such the “letter of intent” published to the world was a missed opportunity to communicate a strong message on an agenda of reform if it had been signed by the president and not the finance minister and central bank governor. The response comes that a head of state signs these letters only a minority of the time. Indeed that’s true. But the point is that heads of state choose to sign them at key moments in their periods in office when they need to communicate commitment to reform and stamp authority. Clearly then this was not possible. To do so would have been to pick sides.

Macroeconomics is too often thought of as two levers that open or close fiscal spending or interest rate stimulus. But the macroeconomic complex is far more complicated as people consider funding of both the fiscus and the balance of payments and the equilibrium of these with the currency and inflation. SA is maybe playing a game too many don’t fully understand.

Attard Montalto is head of capital markets research at Intellidex.

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