It is no exaggeration to say that the SA Reserve Bank governor is the one man standing between SA and hyperinflation, a worthless currency and eventual bankruptcy.
South Africa is running out of money — just when the ANC needs it the most. In the past month, the two bastions of economic common sense left in SA — National Treasury and the SA Reserve Bank — have warned the government in no uncertain terms what exactly is at stake.
It is clear what the trade unions and indeed the majority of the government would prefer to do, especially fighting for re-election next year. Tightening the belt, particularly if that entails cutting social security spending, is simply out of the question. Pre-empting this, 10-year SA bond yield spreads have already widened from 11.50% to an eye-watering 12.4% in a matter of weeks. The ZAR has weakened from 17.50 to the dollar to around 19.
All of which puts Ramaphosa in a difficult situation ahead of the polls next year. Either cut social benefit spending to fund higher borrowing costs and keep the deficit under control, or face yields rising even higher and the rand weakening further. Sadly, the latter simply has to be the most likely outcome, in which case investors should expect South Africa’s twin budget and current account deficits to widen even further.
Now, such a delusion calls into question the quality of economic forecasting at Treasury, unless they were simply being duplicitous. If draconian cuts are not made to public sector employee salaries and social benefits, one could expect a deficit of more than 5% in 2024 and debt-to-GDP higher than 75% by the end of 2024. These are base-case Bloomberg estimates, which could even turn out to be optimistic.
But next year his mandate will be up for renewal. Odds are that he will be kept on, or another establishment candidate from the central bank will be offered the role, such as Deputy Governor Fundi Tshazibana. However, at some point in the future the dominant political forces within the ANC could coalesce to ensure a more lenient hand is on the monetary tiller.
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