The Ugly future of the SA Economy as government undermines the West

The risks to the economy and financial system that the ANC’s flirting with Vladimir Putin’s Russia poses, have been spelled out in no uncertain terms by the South African Reserve Bank.

The Reserve Bank does not engage in alarmist language, so when it warns of the government’s flirtation with Russia’s economic and financial system, it is important to heed its advice.

Only praying that Pretoria is paying attention. More likely, the zany demands of some fringe economists for Bank governor Lesetja Kganyago and the entire monetary policy council to go are influencing the ANC leadership.

Their offense? increasing the repo rate by a further 50 basis points last week, a move that failed to stop the rand’s slide and damaged the prospects for the nation’s development.

On the subject of why the rand lost even more ground, economists are sharply divided. Was the market dissatisfied that the Bank wasn’t more hawkish than anticipated (which was a 75bp increase)? Or did it consider the hike to be overly pessimistic, a monetary policy mistake that would send the economy into a downturn?

If South Africa has reached the point where additional rate hikes will not only be pointless but actually destructive, that is a more intriguing topic to ask.

There certainly seems to be a growing understanding that fixing the country’s basic infrastructure, from the crumbling electricity and water infrastructure to the precarious logistics system, is the only way to reduce inflation and boost GDP. Additionally, it ought to put off the Brics summit forever.

Instead, the meeting will take place in August, but not before President Cyril Ramaphosa’s administration makes every effort to avoid its commitments to the International Criminal Court. President Cyril Ramaphosa will be seen shaking hands with his West’s opponent if Putin attends. Then, just watch the rand increase in value; above R20/$ becomes more likely every day.

In its biannual Financial Stability Review (FSR), released this week, the Bank clearly outlines the dangers.

The entire financial system is still “resilient” for the time being, but the Bank warns that in the future, even slower and more unequal economic growth would certainly put that to the test. The Financial Action Task Force’s grey listing of South Africa and the protracted energy shedding are not helpful.

The Bank has added two additional risks to the extensive list of issues we already worry about, in addition to the mounting systemic risk: the risk of capital outflows and the possibility of indirect sanctions being placed on the nation due to its stance on the Russia-Ukraine conflict.

The FSR’s worst-case scenario is that local financial institutions may be shut out of the international financial system and unable to pay for imports like oil in foreign currencies, which would result in a rapid halt to capital inflows and an acceleration of outflows. The pace of economic expansion would abruptly stop.

The African Growth & Opportunity Act, which grants South Africa preferential access to the US market, runs the risk of not being extended when it expires in 2025. According to the FSR, this will have “severe consequences” for the companies that have benefitted from the agreement since it was established in 2000.

However, the administration appears to be doubling down rather than taking these cautions seriously and reversing course. The only power that can effect genuine change is the power of the vote, which is up to regular voters to use now that monetary policy appears to be rendered powerless.