The state of the economy of the country obviously impacts on share prices over time. In this regard, private investors need to consider five inter-linked variables – the inflation rate, the level of interest rates, the money supply, the balance of payments (BOP) and the business cycle. These five factors are alternately impacted by and impact on the strength of the rand against other currencies and especially the US dollar.
The monetary policy committee (MPC) of the South African Reserve Bank (SARB) meets every two months to adjust monetary policy and especially the level of interest rates to balance its two opposing objectives of price stability and economic growth. The level of interest rates is alternately increased or decreased to stimulate the economy or reduce inflation. So the MPC is always either putting its foot on the accelerator (dovish policy) or the brake (hawkish policy).
But monetary policy can generally only have a mild impact on the economy over a period of months. It cannot overcome the type of structural problems which are besetting the South African economy. Those structural problems are really three-fold:
- The civil service, including the state owned enterprises (SOEs) and municipalities, is far too large, corrupt and very inefficient. This has led to a massive and growing wage bill which this country can no longer afford. It also causes endless bureaucracy which impedes business at every turn.
- The labour market is too heavily balanced in favour of employees and against employers (i.e. businesses) with the result that employers avoid employing people at all costs leading to high unemployment.
- The level of government indebtedness has become unsustainable – this, of course, includes the debt of municipalities and SOEs. The high debt levels mean that there is now very limited room for programs to provide service delivery or improve infrastructure – which, in turn, is leading to virtually continuous service-delivery protests across the country.
But South Africa is not a “banana republic” – mainly because the Reserve Bank has managed to maintain price stability and avoid any type of currency debasement. The MPC has held on to its independence and resisted the temptation to take the easy way out by printing money (euphemistically called “quantitative easing”).
In fact, South Africa has managed to bring the average inflation rate down from the upper end of the target range at around 6% to the mid-point of the range at around 4,5%. Under the circumstances, this is an extraordinary achievement – and one which the ratings agencies give us full credit for.
We are now at the point where reducing interest rates to stimulate growth is again possible and, indeed, desirable. We fully expect the MPC to begin gently stimulating the economy soon, especially if the rand remains stable against the US dollar and other hard currencies. This stimulation will not have an immediate impact, but it will gradually give business and the consumer more breathing space, resulting in increased spending.
Cyril Ramaphosa will have to address and deal effectively with the structural problems besetting the economy. Without that, we cannot hope to extract ourselves from the current zero growth situation. And fixing those structural issues is bound to be both unpopular and politically dangerous.
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