Insights category - Markets economy
Markets & economy

What can be done to address SA’s fiscal crisis?

Global economic activity continued to gain momentum in the last quarter of 2017. Global purchasing manager’s indices, which are a good barometer of current and prospective short-term business conditions, are at a multi-year high, indicating strength in both manufacturing and services. Strong demand is putting upward pressure on the prices of industrial commodities and energy. There are signs that the growth in global trade is starting to accelerate. While most regions are growing, the fact that the US dollar has been weak is an indication of continuing improvement in business conditions in Europe and the emerging markets. Despite exceptionally low interest rates, inflationary pressures remain subdued.

Due to political and policy failures, South Africa is among a small group of countries that are not benefiting from the strong surge in global growth. With business and consumer confidence at extremely low levels economic stagnation persists. Now that the ANC national congress is behind us, the focus of the political debate will shift from the issue of leadership to what is to be done to address our current fiscal crisis. The only effective option available to bring the burgeoning fiscal deficit under control is to increase the VAT rate by 2%. The strength of the rand following the conference is partly due to dollar weakness, but also reflects the assumption that the new leadership of the party will be able to take decisive actions, which will restore investor confidence. Failure to do this is likely to leave the country trapped in economic stagnation.

Due to the weak economy, inflationary pressures in South Africa remain subdued, with the November 2017 CPI at 4.6%. However, this is also the consequence of a stable rand, which appreciated against the dollar from R13.70/US$ to R12.31/US$ during 2017, due to continuing foreign investment inflows.

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