Donwald Pressly

Inside Parliament: SA staring a debt trap and an IMF bailout in the face

2015-05-14 12:08

Donwald Pressly

Some may view RW Johnson as a doomsayer, perhaps even a right wing nut, but he has an uncanny ability to foresee the future. He believes that it is likely that the DA and the EFF will form coalition governments at municipal level next year. It is a likelihood that South Africa will – if current fiscal and monetary trends continue – enter a debt trap.

South Africa could find itself standing before the IMF with a begging bowl. He believes that even the survival of South Africa as a unitary state cannot be taken for granted. He believes an IMF bail-out would lead to a regime change “of some kind”.

All the economic disasters could happen in two years, if something radical is not done. But he doesn’t believe anything of the kind will be done.

In the 1970s Johnson wrote How Long Will South Africa Survive? Although some of the predictive detail was off kilter, he got the timing of South Africa’s transition from apartheid pretty much right. He has now written a new version of the book: How Long Will South Africa Survive? The Looming Crisis. It makes for sober reading.

The only way, he argues to avoid the IMF intervention would be for the government to pre-empt such an eventuality by carrying out IMF-style policies itself. “That was exactly what (then Deputy President) Thabo Mbeki had done under the Mandela government in 1996.” It was the much despised GEAR policy and Mbeki – and then Finance Minister Trevor Manuel - were never quite forgiven for it. Johnson believes the policy worked. Currently everything suggests the economic slide – ushered in by the Jacob Zuma era - will continue “ending with a further downgrading by the credit agencies”. Should South African bonds descend to junk bond status, the effects would be dramatic.

Noting that the appetite for SA bonds were strongly increased by the country’s inclusion into Citibank’s benchmark world government bond index in 2012, foreign purchases of SA bonds doubled to R93.8bn against R42bn that year. That good news would evaporate if there was a further downgrading. It would remove South Africa from the index, noting that all manner of international pension and insurance funds are forbidden by law to trade in junk bonds as most were tracker funds. The result would not only be a sharp rise in the cost of debt, but in absolute terms it might be difficult to fund the debt at all.

Johnson notes that during its annual country consultation in 2012, the visiting IMF delegation “expressed considerable shock at Pretoria’s priorities”. While the recession required Keynesian counter-cyclical public expenditure – as SA claimed to be implementing – it was not spending the money on infrastructure, despite much noise about it, to mop up “some of the mountainous unemployment” and to make the country more competitive and ready for the upturn. Instead since President Zuma came to power public servants had got a staggering 40 percent increase. “The government had borrowed massively abroad merely in order to give the money away to already overpaid public sector workers,” reports Johnson.

The IMF urged the authorities to claw back the public sector wage bill to pre-crisis levels. Johnson noted this week at the Cape Town Press Club that the state had already buckled to union demands of above inflation hikes – the latest offer at seven percent, above the inflation target range again.

With no signs that attempts were being made trim the trade and fiscal deficits, Johnson believes that we face the IMF option or the Mugabe option. He believes the former is more likely but does not rule out the scorched earth approach of the latter being the chosen route. The first option would likely see an ANC/DA Fusion government – like in the 1930s.

It would face all-out confrontation from the Left as it had to follow the international market-friendly conditionalities of the IMF, but after an initial battering the country would be better for it. The other option, an ANC/EFF government following a scorched-earth Mugabe-head-in-the-sand route -  which included socialists, trade unionists and communists was just too ghastly to contemplate.

Johnson has stuck his neck out. He has entered predictive territory to which most economists and analysts won’t go. One just hopes to goodness that he is dead wrong and has missed the political and economic plot. But one fears he has not.

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