Must we really endure ‘punishing’ markets?

Read More

Policymakers who veer off track will be punished. 

This message has dominated discussions in recent days, as analysts take stock of last week’s medium-term budget policy statement and South Africa’s rather grim economic outlook.

These warnings come in the aftermath of the Liz Truss debacle, which saw the United Kingdom being rapped on the knuckles for its erstwhile prime minister’s all-too-aggressive tax-cutting policy, which was aimed at getting that economy moving. 

Markets were swift in showing their contempt for the plan, which also sought to increase government spending to help people deal with the cost-of-living crisis.

The message from Truss’s ousting: in today’s tight financial conditions, and with elevated inflation yet to be brought to heel, no economy will be spared the wrath of the markets if they try to play fast and loose with policy.

This vicious state of affairs is something the average consumer, who in South Africa is gasping for relief, has been told to live with. The financiers are in charge now and policymakers have to fall in line, even if it is to your detriment. 

It is bad news for South Africa, which has had its economy choked during a period of belt-tightening. What the economy is most in need of — game-changing macroeconomic policies that will resuscitate growth and bring down unemployment — would mean going off track and risking more market-induced pain.

This is part of the reason Finance Minister Enoch Godongwana’s medium-term budget policy statement, which contained very positive fiscal projections, didn’t quite land as it should have. 

The market-friendly finance minister was sure to allay any fears that the forecast end to fiscal consolidation would leave the public purse exposed once again. Relief from the failing economy’s onslaught will take years — and that relief comes with the pretty big caveat that whatever money is put towards building public infrastructure is spent wisely and that the private sector is satisfied enough to also invest more.

For the time being, government spending will continue to prioritise building fiscal buffers to ensure the economy can endure future shocks. This means a number of agonising trade-offs will continue to be made.

Meanwhile, the public sector wage bill continues to be held over our heads, with the threat that, if it becomes even more cumbersome, it will further shred service delivery. How the government deals with this will be watched closely by ever-vigilant markets.

Speaking at an event this week, Razia Khan, chief economist at Standard Chartered, spelled out just how little room to manoeuvre policymakers now have. “Markets are disciplining everyone,” she said.

“In the current context of tight global financial conditions, there is no room to get it wrong. Even developed markets will be punished fairly significantly if they try to veer off course … The stakes are higher. During those years of ultra-easy, very accommodative policy at a global level, when countries could pretty much do what they wanted and some would make mistakes … they wouldn’t be punished for it. Those years have gone.”

Those who are seen not to be trying hard enough to push conservative policies and reforms will feel the wrath of financial markets.

Khan’s advice is along the lines of Reserve Bank governor Lesetja Kganyago’s message during a public lecture this week, where he expounded on the dangers of expansionary policies. 

Even though consumers can barely tolerate another blow, there is still room to hike interest rates, Kganyago suggested. Doing the opposite, he said, would have little effect on lifting growth or lowering the country’s high unemployment rate.

The high stakes that Khan alluded to come after policymakers in advanced economies, and to a lesser extent emerging market economies, were forced to do everything in their power to keep demand from stalling. These interventions came in the form of increased government spending as well as interest rate cuts.

That stimulus resulted in the far too buoyant rebound of some economies, which meant supply could not keep up with demand. Prices soared and, although the transitory camp held out for as long as they could, it eventually became clear that inflation was back with a vengeance.

Central banks have had to act by raising interest rates, sending some economies to the brink of recession. And, as the International Monetary Fund warned last month: “The worst is yet to come.”

Today monetary policymakers are faced with the dilemma of whether to take their foot off the accelerator, or to keep hiking rates amid continued uncertainty about inflation’s trajectory. Mistakes will be costly and there will probably be pain either way.

Financial market stressors, Khan noted, are still in place and central banks cannot take for granted that currency volatility looks to be sticking around.

In South Africa, the government is faced with managing large debt redemptions, which between 2023 and 2031 will average R192.8-billion a year, compared with R43.8-billion a year between 2017 and 2022.

Higher debt redemptions increase the risk that changes in demand for government bonds, a depreciation of the rand and borrowing rates will override the benefits of positive fiscal outcomes. 

Markets will be pricing in the implications of this and, again, the government will have to reassure them that it has this task under control.

In all these discussions about discipline, the undue influence financiers have over policy is seen as a natural fact, with little air time given to how this chokehold could be broken. 

But it is important, perhaps now more than ever, to question these conditions, especially given how much financial markets are interfering in governments’ ability to solve some of their most pressing problems.

In South Africa, the sacrifices that are made at the altar of financial markets have left many worse off than ever. The government ought to heed other warnings, because the people’s punishment can be just as swift. 

Sarah Smit is a Mail & Guardian business reporter.