If AI wrote a government policy document, it would probably start with some combination of these three words – poverty, unemployment, and inequality. They are indeed our biggest three challenges. But they are often used together, in one breath, despite being three separate problems.

Take the R370-a-month social relief of distress (SRD) grant. Researchers at UCT showed that it makes a meaningful difference to poverty. That such a small amount can make such a significant impact on people’s lives is probably one of the saddest research findings I have seen. It might encourage people to search for jobs in the short term but probably discourages it in the long term. A joint Stellenbosch-UCT research paper showed that raising taxes to pay for the grant has probably led to job losses.

What about the grant’s impact on inequality? Surely it has helped there? You might think so, but it actually does little to reduce inequality. South Africa’s inequality is so ridiculously high that giving those on zero incomes R370 a month makes barely a dent.

So, the SRD is best framed as an anti-poverty policy. It is what it is, and that is what it is.

This is a policy trilemma. Faced with three policy problems, one can only pick one. Or as my grandmother would say, “You can’t have everything in life, dear”.

Stellenbosch University professor Servaas van der Berg, one of the country’s most influential development economists, argues in a new working paper, “Poverty Reduction Under Structural Constraints: Growth, Inequality and Policy Trade-Offs in South Africa”, that “moderate growth generates substantial reductions in poverty”. In contrast, “plausible medium-term reductions in inequality make a smaller incremental contribution”.

Why? Because structural features of the South African labour market: high unemployment, high returns to education, and persistent wage inequality anchor overall inequality and limit the speed at which it can fall.

Inequality is so baked into the structure of the South African economy that Van der Berg finds that even a six-point drop in South Africa’s Gini coefficient would do less for poverty reduction over the next 15 years than sustained moderate real economic growth.

Van der Berg makes the case for the Tinbergen principle, named after Jan Tinbergen, the 1969 Nobel Prize winner in economics. He built the world’s first national macroeconomic model.

Tinbergen’s insight is that each policy should have one policy goal in mind. Using policies to achieve multiple (and sometimes conflicting) ends is a recipe for a policy muddle. By trying to do too much, you end up not doing very much at all.

Arguably, preferential procurement also falls into this trap. It aims to do more than one thing: obtain goods and services for the state cost-effectively plus at the same time achieve other goals.

The system used to work by allocating 80 points to price and 20 points to empowerment and social goals. (It is in the middle of being changed but it is all in the courts). The outcome is that the more empowered you are, the higher the price you can charge for what you sell to the state. This is what National Treasury referred to in Parliament as the “procurement premium”.

The consequence is that government, by design, is paying more for stuff. The hope is that this increased spending will reduce inequality and support black entrepreneurship.

The only way to achieve this, though, is to have higher taxes. VAT is one of the largest sources of tax. Every single South African pays VAT. You pay it before you are born, when your mom buys maternity goods. You pay it after you die: funerals are subject to VAT, as are the costs of grave site maintenance. It is the great inescapable tax for everyone. The most recent employment equity data shows that personal income taxpayers are increasingly black. And as business is transforming, even corporate income tax is increasingly levied on black firms.

The procurement premium is thus being paid by all South Africans, but the benefits flow to those that have tenders with the state.

The Democratic Alliance recently proposed a same-same approach. Their system also relies on a procurement premium, but the premium goes to firms that contribute to the Sustainable Development Goals. This sounds wonderful but is quite vague and more difficult to audit than the BEE system. Imagine your auditors at financial year-end asking for audit evidence on how you’ve improved human development in the world?

The DA proposal essentially wants the procurement premium to be used to solve all the world’s problems, not just inequality. Ambitious? Yes. Workable? Possibly not. Perhaps anyone that bids for government contracts should also show what they have done today for world peace.

The Constitution requires that government procurement be “fair, equitable, transparent, competitive and cost-effective”. And while it does allow for preferential procurement, the policy question remains: are these additional rules worth the cost?

Politics is all about choices. No single policy can solve all problems at once. That said, the evidence shows that faster economic growth can make a meaningful dent in South Africa’s three main challenges over the longer term. More growth means more jobs and more money for the fiscus. This will help increase spending on things like education and healthcare and social grants, which will lower poverty and, ultimately, inequality.

The Tinbergen principle suggests you should pick policies to achieve one clear objective. But if ever there was a magic bullet that comes closest to defying this theory it would be policies that accelerate economic growth. We should really try it out sometime. Perhaps my granny was wrong all along: “If you grow, you really can have everything in life, dear!”

Then, the QB was big news. It contained the GDP estimates, the current account and all the cross-border financial activity data… sometimes even some research articles, and if we had all behaved ourselves, and managed to not tear open the box in our excitement, there would be a treat… a technical note on an arcane statistical matter! (Here is one on the new labour statistics). All manner of things that make macroeconomists excited. We’re an easy bunch to excite. And the apex one was the March QB because it contained (wait for it) the annual estimates of everything. Quarterly and Annual. In one place! Glory be, I need to sit down and have a cup of camomile tea to calm me myself down.

The QB is the oldest and grandest of Reserve Bank publications, and it has been with us since 1946. The foreword to the first one promised that it would be expanded over the years. Today it stretches to 318 pages. This is 122 pages of economic analysis; and 166 pages of statistical data. If you want to read a summary of how it has all been done since 1946, then this really great publication is for you.

But it is no longer deemed newsworthy. While it still contains a treasure trove of interesting information, by the time it comes out, all the big stories have been told. All the GDP estimates now come out from StatsSA a few weeks earlier, the current account figures are also released ahead of time, as are the labour market figures, the inflation numbers, and so forth. Also the QB’s Economic Review is the longest, but hardly the only, summary of the global and domestic economy. Even the SARB creates competitors: the Monetary Policy Review, which summarises the global and domestic economy, the Financial Stability Review, which summarises the global and domestic economy, the multitude of Annual Reports for various parts of the Bank, each of which summarises the global and domestic economy, and the Monetary Policy Statements, which summarise the global and domestic economy. The SARB probably generates over two thousand pages of economic analysis a year. But, the source of almost all of it is the QB. (Perhaps the new Chief Economist will apply his or her mind to sending us fewer documents to read, and I would keep the QB.)

But this does not render the QB obsolete. And it still deserves to be carried in the news. If anything, the March QB retains the crown. It is the first time we get all the pieces of 2025 put together in one place. It is, if you like, version 1 of the story of 2025. A 318 page long story, but a story nevertheless. The statistical tables are the basis for every graph every economist draws for every presentation.

So here I go with my summary: Five Fun Facts About 2025 from the Quarterly Bulletin.

All the data is available at the Bureau for Economic Research’s DataPlayground. But the best way to understand the QB is actually to download it. I don’t know how to get a printed copy anymore. Maybe someone will send me one via carrier pigeon to Stellenbosch.

Fun fact 1: Long-run average growth has been 3%

We now have 80 years of QB economic growth data, from 1946 to 2025. Growth averaged 3.03% a year. In the post-Apartheid era, the best decade was 1996 to 2025, with growth of 3.3%. Excluding the COVID contraction makes the 1986 to 1995 decade the worst (1.3%), and the most recent decade the second worst (1.5%).

Of the last 80 years, 44 of those years saw growth of 3% or more, and 17 years saw growth of more than 5%.

We have only experienced 10 years of zero or negative growth, and one of those years was COVID. That’s 70 years of growth, at an average pace of 3%. It starts adding up.

The fastest post-Apartheid year was 2006, where annual growth touched 5.6%. Between 1994 and today, just under half of all years have seen growth of over 3%. All of those were before 2011 (excluding 2021 which was a weird post-COVID bounce).

So yes, I think we can get growth back to 3%.

Fun fact 2: GDP per capita has stagnated

The QB provides the first official estimates of GDP per capita. It rose by 0.1% in inflation-adjusted terms between 2024 and 2025, which is pretty much nothing. In nominal terms, it is now R122,140 or R10k a month. The SARB doesn’t publish a population estimate, but its not difficult to get it from the GDP per capita figure. Their population growth estimate is 1.0% and they have the population at 62.6 million. This is half a million less than than the 2025 StatsSA mid-year population estimate of 63.1 million, but what’s a half a million people between government agencies? (StatsSA has population growth at just above zero).

The average citizen is 6% poorer than in 2013, which is when we were the richest we have ever been. At an extraordinarily prescient piece of writing, Stephen Grootes described that year it as the Great Splintering, as the post-Manguang ANC began to collapse. Madiba also passed away that year.

If you want a fun fact for dinner parties: in the roughly twenty years between Mandela becoming President (April 1994) and the year that he passed away (December 2013), the average South African became 30% richer. We have only become poorer since. Maybe we should ask him for a macroeconomic policy strategy?

And who has been the worst President by this metric? PW Botha. Between 1981 and 1987, per capita GDP contracted 9.3%, and between 1981 and 1993 it shrunk 15.7%. GDP per capita in 1994 was equivalent to that of 1968.

Current GDP of R10,000 a month might sound a lot. It does, of course, mask enormous variation.

The IMF compares countries,1 and in 2026, they reckon we are the world’s 107th richest country, coming in at US$6,835 (or R116,000 a year or R9700 a month). This is less than half the world average (US$14,217, which is around R240,000 a year or R20,000 a month).

Yes, read that again. The average GDP per person in the world (including everyone from the richest in Liechtenstein to the poorest in South Sudan is around R20,000 a month, and our average GDP per person is R10,000 a month. Maybe we should try be average.

Fun fact 3. Investment growth is negative

See what I did there? I wrote something down that makes no sense, and you didn’t even notice. Growth can’t be negative. If growth is negative, that is economese for shrink. Investment shrunk. We invested less in 2025 than we did in 2024.

Hidden on page 24 of the Quarterly Review is this fun fact, written in that typical SARB understated way: “As a result, the ratio of nominal gross fixed capital formation to nominal GDP decreased further from 14.5% in 2024 to 13.9% in 2025.” Here is a graph of the investment ratio back to 1946. Excluding COVID, 2025 was the worst year ever.

Fun fact 4: Fun fact 2 and fun fact 3 are related

I doubt this comes as a surprise, but our GDP per capita stagnation is arguably largely due to our investment stagnation. Not only has investment stagnated, but it has also become less productive. I sommer wrote a whole paper about this for the ERSA Growth conference (available here). Fortunately you don’t have to read the whole thing as Carol Paton summarised it much more deliciously than I could: It’s the politics, stupid! Why SA can’t create jobs: A combo of weak demand, too much government debt, lack of policy certainty and too much regulation.

Fun fact 5: The bond and equity market

We can’t leave out the equity and bond market. 2025 was quite the year.

The first point of interest is that the QB pulls together the listings information on the JSE, A2X markets, the Cape Town Stock Exchange and the Integrated Exchange (previously Equity Express Securities Exchange). A2X does secondary listings, so isn’t necessarily a source of new capital raising, but clearly there is stuff happening on the Cape Town Stock Exchange. It now has a market capitalisation of R7.3 billion, although one company (NV Properties, which owns the Premier Hotel group) accounts for R2.6 billion. Other fascinating companies on the CT Exchange include a Mohair and Sheep company, a renewables company and a Northwest farming company, and one that operates across South Africa.

These are the sorts of small and medium enterprises that the JSE doesn’t attract (nor is trying to attract?). The QB even sniffly notes (on page 90) that: “The number of listings on the JSE also declined in 2025, following 16 delistings and 7 new listings, as some small to medium-sized companies found the compliance and administrative costs of being listed on the JSE too high. In response, the JSE launched simplified listing requirements on 13 January 2026, aimed at reducing the complexity and compliance costs of listing and to encourage new listings.”

Of course, that is not the big story of 2025. It is in this paragraph which is how many will remember 2025 (and should have / would have / could have sold on 27 February 2026, before Trump did his thing in Iran). Bold is my excitement.

“The domestic share market performed exceptionally well in 2025, with the Alsi, in rand terms and on balance, surging by 37.7% – its best annual performance since 2005. The Alsi surpassed the historic 100 000 index-point milestone for the first time on 23 July 2025 and reached 115 832 index points on 31 December. In US dollar terms, the Alsi rose by 55.3% in 2025, significantly outperforming its emerging and developed market counterparts. … The Alsi extended its gains into early 2026, reaching an all-time high of 128 456 index points on 27 February, supported by the stronger precious metals and mining share price index within the resources sector. Following this peak, the Alsi corrected rapidly by 10.5% to 114 924 index points on 13 March as the war in the Middle East weighed on the performance of global share markets.”

This busy line graph is the story - the FTSE/JSE All Share in US dollars has pretty much outperformed everyone.

Curiously, this was not (what I thought) because of inflows into the JSE from offshore. To quote: “Non-residents’ net sales of JSE-listed shares increased to R219 billion in 2025, up from R145 billion in 2024, according to JSE data.”

So despite foreign sales of JSE shares, the JSE jumped. This leaves only domestic players as the buyers in 2025. But the story changes in the first part of 2026, with the QB noting that: “… this trend reversed as non-residents recorded net purchases of R17.3 billion in the first two months of 2026… [meaning that the share of non-resident holdings of JSE-listed shares increased to 32.9% in February 2026”. Of course, the QB was finalised in mid March and all the analysis ends quite dramatically thereabouts, despite Trump not finalising anything on his side.

So that’s a wrap. Five fun facts: Stagnating GDP per capita, growth below its long term trend, investment down, but the stock market is booming? Is that a leading indicator that we have turned a corner? What will happen to our dear country next? Are we going to have a strong start to 2026 or will the Middle East derail everything?

We’ll have to wait for the next QB to find out.

I told you it’s an exciting publication.

First off, the most important prizes

Best food and venue: ERSA (Hazendal)

Best wine: News24 (tastings of Kanonkop , Villafonte, AA Badenhorst, Creation, Wow)

Biggest in person attendance: SA-TIED (600 registrations and 250 people in the room)

Best format: ERSA. It was an old fashioned format (one paper with discussants). Each paper was commissioned and was written by an expert, and the discussants were all excellent. Shout out to Black Economic Employment Commission head Tshediso Matona for speaking from the audience on the ERSA BEE paper.

Best conference dinner: News24, my highlight was drinking with corruption investigative reporter Jeff Wicks. He kinda scares me, and I think he scares a lot of dodgy people. I kinda like it.

Best networking: Depends on who you are trying to hang out with, but News24 wins by a mile with a collection of our nation’s best CEOs, the President, the Commissioner of SARS, the next leader of the DA, etc. etc. My best networking moments were telling David McWilliams and Eugene Ashton about SA’s first financial crash involving sheep at the News24 winetasting and getting an awesome Tiktok worthy summary from Tim Köhler on the reconciliation of earnings data between the SARS and StatsSA at the SA-TIED dinner.

With that out of the way, we can turn to the less important prizes. Obviously I’ve taken myself out of the running for the prizes. Feel free to comment that I would have won an award in every category.

Best idea: Growth should be our strategy

The GNU needs an economic policy. That policy should be economic growth.

This message came out from all three conferences (they were economic growth conferences after all), but it was most stark at the News24 conference. The President spoke at length (a link to his speech on YouTube is here) but he didn’t clearly articulate a growth strategy. He came closest when he doubled down on the reform agenda, and he was very eloquent on why Eskom needs to unbundle (see his speech from the 27 minute mark), but he missed a golden opportunity to articulate why the economy needs to grow. He also missed the opportunity to point out that growth has doubled between 2024 and 2025, in part because of reforms.

Geordin Hill Lewis phrased it interestingly - he said he is running for leader of the DA based on a pitch to grow… the DA. But, he conceded, the DA would probably grow if the country grew. This is curious. Is this the right way round? Perhaps if the DA presented a compelling inclusive growth strategy, then people would vote for them? The DA’s current economic policy is supposedly built on growth and jobs, but is (in my humble view) an odd mix of policy ideas, and is more promises than strategy. This is odd, because the DA could better articulate what it probably believes (a broadly liberal growth strategy of a smaller state, with less regulation and lower taxes) that would be in marked contrast to the ANC’s vision of every increasing taxes and more and more taxes.

It only underscores the sense that the GNU doesn’t have its own economic policy.

Best speaker: Keyu Jin

The biggest contribution that News24 made to our local debate was to bring in academics from China, India, Ireland and Argentina. We don’t do this sort of thing enough.

So it is perhaps unsurprising that the best speaker award comes out of the News24 conference. It was very much a conference for the professional speaker crowd and they all produced polished performances on the major topics.

Keyu Jin, a Harvard-educated Hong Kong professor, emerged in my view as the best speaker. It was a slightly overly academic presentation (which I liked) given the audience, and she had lots of slides (a lot!) but she brought with her the single-minded Chinese approach to economics. This is deep deep pragmatism (it doesn’t matter whether the cat is black or white, as long as it catches mice) and a thoroughly data-driven approach.

Here is the summary with a link to the YouTube https://www.news24.com/opinions/featured/am-economics-over-politics-how-the-china-model-inspired-day-1-of-on-the-record-20260319-1112

It is worth also watching India and Argentina. More on Ireland later.

Best panel: Godlimpi versus Geordin

For some reason, all three conferences relied heavily on the panel discussion format. All-in-all six days of a group of four or so people having conversations about stuff. Exhausting. Next time, mix it up a bit more please.

But News24 got the 34-year-old head of ANC economic policy (Zuko Godlimpi) and the 39-year-old crown prince of the DA (Geordin Hill-Lewis) on a panel. Throw in the Auditor-General Tsakani Maluleka, and Mbali Ntuli, the former DA leader candidate. Then put Adriaan Basson in charge and you can’t lose.

Godlimpi flailed, because his party is flailing. Napoleon once said: “Never interrupt your enemy when he is making a mistake”. Geordin didn’t interrupt.

Summary here.

Most entertaining speaker: David McWilliams

Economics is actually fun. Promise. David McWilliams makes it so and his address at the News24 conference was funny, clever and good economics. See the summary and watch the YouTube here.

In short: Make your country attractive to capital and investment.

Best paper: Increasing taxes isn’t working

The best paper comes from SA-TIED, written by the head of tax policy (Chris Axelson), Antonia Homann, Jukka Pirttila, Roxanne Rabbe and Nadine Riedel.

Their findings? When the tax rate on top earners (above R1.5 million) was increased (from 41% to 45%), the fiscus lost R6.5 billion. The share of taxes paid by this group shrunk from 11.5% to 10.6%. Sales of affected firms fell by 4%.

In short, that guy at the braai or Dubai has restructured his tax affairs to reduce his taxable income. Raising taxes is not working. It wins best paper because it is an excellent piece of econometric work with results that impact all personal income tax payers, plus the overall fiscus.

Worst use of statistics: Employment and growth

At the News24 conference, Prof Adrian Saville from GIBS said that the employment elasticity of growth is zero.

At the UNU-WIDER conference, Prof Phillipe Burger from Free State said that the employment elasticity of growth is one.

What on earth are they talking about? The employment elasticity of growth is fancy economics speak for the impact of economic growth on job creation. So Saville was saying that growth does not create jobs, and Burger was saying that growth definitely creates jobs.

Here’s a graph from this 2024 BER infographic on the topic. Seems to me that growth and employment go together.

Scariest statistic: Ethekwini elections

At News24, Mbali Ntuli cited an opinion poll for the forthcoming municipal elections in Ethekwini.

ANC: 8%, MK: 44%, DA, 28%, IFP, 18%.

Worst idea: Manufacturing will save us

The conferences took place one after each other, and there was a limited amount of cross-pollination. The one moment was when the News24 boekie was handed out at the ERSA-SARB conference. News24 had a whole chapter on how all South Africa needs to do is to become a manufacturing hub. An expert panel of international experts on manufacturing at the ERSA-SARB conference took a moment out of their presentation to read the opening line of the News24 manufacturing chapter to rubbish this idea.

Their very technical paper is here, but what it basically argues is that South Africa is moving strongly into services. This has been good for employment and generally good for growth. They call this “servicification”, the idea that growth is being driven by increased services. Moreover, services are an excellent place to soak up the millions of unemployed. At the News24 conference dinner, a speaker from Uber highlighted how many earning opportunities they were creating for the unemployed. Now we can quibble about the gig economy, jobs standards etc. but you got to admit that there are millions of young male South Africans and non South Africans getting some kinda income.

Source: Hamilton and Mensah (2026)

The same message also came out of Lawrence Edwards excellent paper at the ERSA-SARB conference focussing on trade. Edwards, probably the nation’s foremost trade economist, pretty much reminded all of us of the theory of comparative advantage. You can’t outrun your destiny or your comparative advantage.

You don’t need to read much more than these few sentences of the abstract to get the gist:

• Current localisation strategies will not develop a robust export base

• Industrial policy should prioritise horizontal approaches that address widespread constraints on export activities, rather than focusing on select sectors.

• Furthermore, trade in services should not be overlooked. The rise of digitalisation offers new potential for services exports, but this necessitates reducing the restrictiveness of South Africa’s regulatory environment

Here’s a great slide from Edwards on the services theme.

This leads us to…

Worst zinger: Let’s pick a winner

Unfortunately Lisa Seftel didn’t go to the ERSA conference because at the SA-TIED she literally said “let’s pick a winner”. The audience gasped.

Operation Vulindlela is the triumph of the idea that the government should not pick winners, but rather do stuff that makes it easy for anyone to win. Give firms electricity, transport, water and functioning municipalities, and let them work out who is better at what.

Best zinger: We are overregulated

Seftel also had the best zinger at the SA-TIED conference: the latest attempt to overregulate has led to 13,000 spaza shops being identifed and 200 actually getting registered.

This raises the point, WTF are we trying to regulate the informal economy??? My colleagues at the Development Policy Research Unit at UCT are much more eloquent on this than me, see their paper at section 4.2.3. Its an old paper but that doesn’t matter because the problem hasn’t gone away.

And this gives us…

Best graph: We are overregulated

The graph speaks for itself, it is from Dan Andrews’ keynote address at the ERSA-SARB conference. Presentation here and recording of his remarks here.

And the best conference goes to…

This is difficult. Each conference had a different audience. They were all excellent in their category.

News24 did the job of getting all the politicians (the President, ANC and DA) on a stage to talk about growth. Well done to Adriaan Basson and Ralph Freeze for reminding our leaders that we all just want jobs.

ERSA-SARB did an excellent job of showing that there are many areas of policy that need reform to stimulate growth. I enjoyed big discussions on competition, trade policy and black economic empowerment led by experts in the field. Well done to Fouché Venter and team.

But the winner is… SA-TIED. It wins on numbers alone (biggest audience, most speakers, most papers, most data). It is the economists’ conference. And it has the biggest organising team of them all, led politically by the two doctors of growth Dr David Masondo, the Deputy Minister of Finance and at a technical level by Dr Duncan Pieterse, the Treasury Director General.

SA-TIED is the flagship research initiative of the National Treasury, South African Revenue Service and the United Nations University. It is based on the SARS anonymised tax data and has generated 160 papers, all around the central idea of inclusive economic development.

Academics love the data. It is both a firm level and over time, giving what economists call panel data. This makes them so happy. The result has been an extraordinary corpus of thoughts and evaluations of what works and does not work.

A quarter of all SA-TIEDs papers are actually published by civil servants so the people making the policies, and often reflect the things that worry them. The depth and breadth is quite remarkable, and the debates are intense. One gets the sense that the best ideas win.

The conference was an opportunity to pause and reflect on the work that has been done. Some of the most influential policy papers of the last few years were all out on display.

It is a worthy winner. I also hope that the economics nerds win the debates.

This is an edited repost of a blog from earlier this year on India. It is based on the section in India from my book, How To Fix (Unf*ck) a Country, available at Exclusive Books, Takealot, and other good bookstores. Loot currently has the books at 20% off.

India is an extraordinary case study. Some quick facts:

1. It is projected to grow faster than China over the next few years

2. It has a population of over 1.4 billion and a poverty rate of 12 per cent, meaning that around 170 million people are poor. This is a number that only really hits home when you are actually there.

3. In 1977, the Indian National Congress lost power for the first time, 30 years after independence. From then on, they came and went in and out of power, and indeed it was Congress that adopted an economic reform programme in 1991.

The GDP per capita graph below shows what happened in India. After independence in 1947, the economy muddled along. Singh became finance minister in 1991 and Prime Minister in 2004. Between 1991 and today, GDP per capita in India has nearly quadrupled.

Comparisons with China are often drawn. Both countries grew very fast, but China consistently grew much faster. In the years ahead, India is now expected to grow faster.

… but if you look at per capita terms it is still “catching up” to China.

(Of course, this graph tells us a few things about South Africa: (i) we were richer per capita than China until 2014; (ii) we are still richer on average than India; and (iii) our rapid post-1994 growth came to a shuddering halt in 2008).

So what happened in 1991?

In 1991 India ran out of money, completely. The economy had been so mismanaged that creditors demanded that the gold reserves of the country be handed over physically. The Indian government had to transport forty-seven tonnes of gold to London, and twenty tonnes to Switzerland. And not only that but, as we are told by Y.V. Reddy, the Governor of the Indian Central Bank from 2003 to 2008 and an official at the Bank in 1991,^[i] on the road to the airport, in the middle of the night, the truck transporting the gold burst a tyre. Petrified by what might happen, armed guards surrounded the truck, which now stood marooned in the street. Finally, the tyre was fixed, and the gold was safely taken abroad. For many, this moment – when the gold reserves of India were being furtively removed from the country in the middle of the night – represents one of the lowest points in India’s long and complex economic history.

The year 1991 also marked a low point in the political history of the nation. On 21 May 1991, Rajiv Gandhi was assassinated in a suicide bombing. Gandhi had been prime minster from 1984 to 1989. He was the son of Indira Gandhi, prime minister before him until she was also assassinated, and the grandson of Jawaharlal Nehru, India’s first prime minister after Independence. The death of Nehru’s grandson was a deeply distressing moment.

The 1991 crisis had been a long time in coming. In the years before 1991, India had been spending significantly more than its tax revenues. India’s fiscal deficit was 8.4% of GDP. Government debt ballooned. Imports also significantly exceeded exports, leading to a current account deficit. These ‘twin deficits’ left the country vulnerable to a shock. And soon the shock came. In 1990, Saddam Hussein invaded Kuwait, thereby triggering the Gulf War and, with it, a tripling of the oil price. In turn, the United States went into recession, as did all the main oil-importing countries. India’s foreign exchange reserves plunged and soon it was deep in debt. The only way India could meet its obligations was to pledge its gold to its foreign creditors. And so the gold had to be sent to London and Switzerland, in a truck that burst a tyre.

Unsurprisingly, this deep economic crisis had led to end of the dominance of the Indian National Congress, known to most as the Congress Party of India, the party of Mahatma Gandhi and Nehru, which had run India for the majority of the time of Independence in 1947 until they lost the 1989 elections. Not for the first time in history, a liberation party found itself out of power because of bad economic policy.

It was the elections in 1991 were an extraordinary turning point. In 1991, the Indian National Congress scraped 36% of the vote. It managed to put together a minority government.

Manmohan Singh, the new Minister of Finance, was faced with a daunting list of things to do. He decided to stop trying to prop up the value of the currency, the Indian rupee. At first it plunged but then stabilised. A year later, a dual exchange rate system was put in place, and from March 1993 the exchange rate was allowed to find its level more freely in a ‘managed float’.^[ii]

But it was the reforms to the red tape in which India was tied that made the real difference. The pre-1991 India was known as ‘the Licence Raj’.^[iii] Before the great reforms, if you wanted to do anything, you needed a licence. There were up to eighty different government agencies involved in issuing permits and approvals. Imagine dealing with so many bureaucrats – and, of course, imagine the possibility of one or two of them demanding a bribe to make things happen faster. The more laws and regulations you have, the easier it is for the system to become corrupt.

The complexity of the system, which had tied up everyone in knots, was gradually unbound. The economy was also freed in other ways. Tariffs were reduced.^[iv] Until then, the average tariff in 1990 was 56%, though the maximum was as high as 535%. Most goods had a tariff of 100%, doubling the cost to the end consumer. Before 1991, India had a list of items that specified what could be imported. The new rule was that anything could be imported, except for dangerous goods. This simplified trade significantly. At the same time, rules prohibiting foreign investment were scrapped, and foreign direct investment was encouraged in high-technology and high-investment industries.

In addition, the government announced a new industrial policy on 24 July 1991, which deregulated industry and rolled back the Licence Raj.^[v] Licensing was abolished in an estimated 80% of industries. The need for prior approval to expand or diversify businesses was removed. Restrictions on the industries in which private companies could operate were reduced. As for publicly owned entities, shares in them were sold off. Much as in China, more autonomy was given to existing public sector enterprises to make for less political interference.

The results have been extraordinary. Dismantling the byzantine and archaic world of the Licence Raj with all its restrictions and confusions, as well as opening up India to the global market, quickly unlocked rapid economic growth. The idea was for the government to step back from meddling in every part of the economy, and to allow Indian businesses to find their own comparative advantage in the world. Here the parallels with China are obvious. As a result India has become a major trading hub for the world.

The effects of all this on the Indian citizenry have been spectacular. From 1991 to the present day, income per capita in India has increased by 350%. Between 1980 and today, the average Indian citizen has gone from earning $1,500 to $6,800 per annum. Gurcharan Das, an Indian author and businessman, has described the great sweep of reforms in the 1990s as ‘though a second independence had arrived: we were going to be free from a rapacious and domineering state’.^[vi]

As we have seen, strong finances were key to India’s growth. The country had run out of money but once that problem was fixed, and an economic reform programme was put in place, many of the other problems that India faced could be .worked on.

The reforms were not all good

The reforms laid the foundation for rapid economic growth and global integration, they also brought challenges that have persisted or evolved over time. This included a widening of the urban-rural divide. Travelling through India, the sheer number of people in urban areas is mindblowing and the cities are buckling under the strain of rapid growth and development, while rural areas have been left behind, leading to significant disparities. Spatially this holds true too: states with better infrastructure and institutions (like Maharashtra, Karnataka) attracted more investment compared to less-developed states, exacerbating regional disparities. And, of course, the rise of a wealthy corporate elite increased the wealth gap, with benefits of economic growth not equally distributed. I come back to this conundrum in a separate chapter on Equality, but for now it is important to flag this issue.

But, the bottom line…

In 1993-94, the poverty rate was approximately 45.3% based on the national poverty line (Tendulkar Committee Methodology). By 2011-12, this figure had fallen to about 21.9%, according to the same methodology.

In 1993-94, around 407 million people were below the poverty line. In 2011-12, this number reduced to about 270 million. Thus, the decline from 1993-94 to 2011-12 translates to roughly 137 million people moving out of poverty.

And what’s next?

India’s economy is not only growing faster than China, it’s population is now larger. This is in part because China’s population growth is slowing — fertility rates have been low since the introduction of the one-child policy in 1979 (lifted in 2015).

India now has an estimated 1.44 billion people to China’s 1.42 billion. Put another way, India has roughly 20 million more people than China, roughly equivalent to the population of Gauteng and Limpopo combined.

A recent Twitter war involving Elon Musk and Vivek has highlighted the role of Indian expats in driving tech innovation in Silicon Valley - with up to 40% of CEOs being of Indian origin.

The United States issues around 279,000 H1-B visas or 72.3% of all H1-B visas to people of Indian origin, and one million visas to Indians overall.

And the future? As the chart below shows, the interesting thing is that the Indian economy is still quite small compared to the US and Chinese economies. And remember, that its population is as big as China. So India still has a lot of potential.

With the right policies, there will be no stopping India.

[i] Y.V. Reddy (2018). Advice and dissent. New Delhi: HarperCollins India.

[ii] I. Patnaik and A. Shah (2012). Did the Indian capital controls work as a tool of macroeconomic policy? IMF Economic Review, 60 (3), 439–464.

[iii] S.W. Sanders (1977). India: Ending the permit-license Raj. Asian Affairs: An American Review, 5 (2), 88–96.

[iv] Intermediate goods had tariffs of 146.4%, capital goods 107.3%, consumer goods 140.9% and manufacturing goods 107.3%.

[v] India before 1991 website, the 1991-economic-reforms

[vi] Gurcharan Das (2000). India unbound: a personal account of a social and economic revolution. New York: Knopf.

Tito Mboweni

One of the very first things I did when I became Minister of Finance, in 2018, was to bravely put together a party made up of economists – and one farmer. I called it the “Economic Growth Colloquium” and I hosted it at the South African Reserve Bank Conference Centre. I am particularly proud of the Conference Centre as it was added when I was the Eighth Governor. So you could say I had some home-ground advantage.

I needed that home-ground advantage! Economists are a cantankerous and argumentative bunch. To have one of them at a party might be seen as carelessness; to invite two of them would be a misfortune. We had a room full of them! Can you imagine what it was like? Michael Sachs, who is one of the smartest economists in the country – despite been brought up by a lawyer – famously quipped afterwards that the only thing he learnt after two days was how to spell the word “colloquium”.

But Michael was just being his usual contrarian self. It was not the only thing we learnt. The first lesson is an enduring one – that is that economists are full of ideas, they have all thought long and hard about growth, but that they actually largely agree. Well, almost all of them. Indeed, afterwards a group of economists wrote a letter complaining that they were not invited to the Colloquium – despite some of the signatories being in the actual room and presenting! These people!

What is the collective noun for economists? A babble! If you put a babble of economists together on a topic as broad and wide as economic growth, you might find discussion with them quite tedious. But that was not the case!

We covered many issues – the lack of a stable supply of electricity, the difficulties of getting an education system going, slow and complex logistics chains, and so forth.

To create a bit of vigorous debate, I brought along a farmer from my hometown in Magoebaskloof. We discovered that what a bunch of Johannesburg economists and Pretoria policymakers thought about economic growth was completely different to what life is actually like on the ground for someone trying to run a business in a deep rural area. The farmer brought a breath of fresh air. He spoke about the practical things. He needs roads to get his oranges to the local market. He needs a port to get his oranges to a global market. He needs electricity to run the farm. He needs skilled workers to deal with an increasingly sophisticated business.

Coming out of that Colloquium, the National Treasury published a paper, called Towards a Growth Agenda for South Africa. Ah, these bureaucrats love their long documents… In true Treasury tradition, the paper was a dense technocratic exercise that pulled together years and years of research on economic growth. The young guns in the economics team at the Treasury called it their MICROECONOMIC MANIFESTO, and like all good revolutionaries they were quick to explain it to anyone that listened. Of course, unlike other MANIFESTOS, it came with a long reference list, lots of footnotes, and lots of technocratic words likes “logistics chain” and “network industries”, “telecommunications reform” and, of course, that lovely phrase that economists bang on about incessantly: “structural reform”.

Of course, those of us that have read the secret dictionary of economists know what they mean by such fancy words. Economists love trying to sound cleverer than they really are. “Logistics chain” is really that road, train and port the farmer wants. “Telecommunications reform” really just means getting in cheaper wifi and a cell connection that works everywhere.

And “structural reform” is not some terrible medication. It is about keeping up with the rest of the world – expanding your cell phone network to deal with the latest advances, making sure that the way you provide electricity is not how they did it during the days of the Model T Ford, and building ports that work efficiently. This seems like bloody common sense – why economists have to befuddle it all by calling it “structural reform” is one of those great mysteries of the world that one might never solve.

We then put the paper out. Gosh! The hullabaloo!

Cabinet listened. The ANC National Executive Committee listened. Cabinet adopted the plan.

But in the last four years since the plan was published, a lot has happened.

This book is an opportunity for us to pause, regroup, and look forward. How much of that plan have we adopted? What more do we need to do?

The Treasury plan was an exercise in technocratic economic English, written by a set of super competent Treasury mandarins with a string of economics degrees from Harvard, Oxford, the London School of Economics and so forth.

This book is different. It is designed to be a much more accessible introduction for a general audience. Nevertheless, if it stokes your interest, please look at the endnotes, read the books cited, and engage with the ideas.

This book aims to be a bit controversial. It is not a detailed treatise on the latest deepest reaches of academic thinking, packed with dense ideas and complex academic formulae. Rather, it aims to provide the general reader with a bit of a tour of the big characters in growth theory, their big ideas, and then to put forward some simple ideas on how to get South Africa’s economy moving. It is ultimately a story about economic cooks and their recipes.

How is it that some countries advance so quickly, become wealthy and successful? Some countries, like China, have boomed periodically – in ancient times, in medieval times, and in modern times. Others, like Greece, boomed only in ancient times, and others, like South Korea, have only boomed in recent decades.

For our purposes, the question is: how is it that some poor countries suddenly take off?

This question has puzzled economists, anthropologist, sociologists and [?] for decades. Speaking at the prestigious Marshall Lecture in 1985, Robert Lucas, one of the fathers of modern growth theory, famously said: “Once one starts to think about [economic growth], it is hard to think about anything else.”[1]

Indeed – once one realises how absolutely central economic growth is to progress, it is really impossible to think about anything else!

The great thing about the world is that, in 2023, people across the world are living longer, are more well-off, better educated, and generally politically more free than in 1923, one hundred years ago.

Martin Luther King famously said that “the arc of the moral universe is long, but it bends toward justice”, meaning that there is an unrelenting drive towards a realisation of rights for millions. Similarly, given the great ingenuity of the people on this earth and in this country, there is a relentless drive forward in terms of economic progress. Through raising millions out of poverty, economic growth brings a type of economic justice. Although it is slow, the world economy continues to grow, and slowly year-by-year, millions are lifted out of poverty. With the right policies, the lives of our children and grandchildren can be much better than the lives of our grandparents and our great-grandparents.

You might interpret MLK’s words to mean that the arc of the universe is long, but that it bends toward justice, economic and otherwise.

So standing here in the early 2020s, this book takes a defiantly positive approach – just as the past century has seen great leaps forward in the world, so to the next century is likely to see great leaps in justice and material progress for everyone.

This might seem strange – while the great sweep of history has been a positive one, right now things are looking more than a little worrying.

In between all the short-term issues, there are also two long-term challenges: climate change and inequality.

On climate change, we urgently need to overhaul the production structure of the economy so that it stops harming the earth. We cannot go on pretending that pumping tonnes and tonnes of carbon into the atmosphere is a good thing. We must make a change. We have done this before – once upon a time, there was a hole in the ozone layer, but we banded together to close it. We can do the same with carbon emissions. Those that say that growth and climate reform work against each other? Wrong! We can build a growth agenda that protects the earth. It is not about stopping growth; it is about directing growth.

The challenge of inequality similarly bears down upon us – one of the themes in this book is the idea that when countries grow, some are left behind. Sometimes this is because of where they live, what their education levels are. Too often, even as the world is slowly becoming more and more democratic, people are left behind and do not benefit from economic growth due to their race or gender.

We cannot be complacent. While the great arc of history bends toward progress, it only bends because we choose to bend it. Everyone should work on bringing about a world and a country that aims to grow and succeed.

This book aims to SHAKE THE BAOBAB TREE and create a conversation.

My hope is that it stimulates a discussion on growth. We need it!

Tito Mboweni                                                 

Magoebaskloof

[1] Lucas Jr, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.

Many people have been asking me how my ‘Six E’ policy priorities compare with the GNU agreement. In short, there are significant overlaps. My ideas under each E are in line with the overall GNU policy.

The big difference is, of course, that my list is (1) a lot shorter; (2) a lot more focused. It list of key things that must be started and done as soon as possible. It conveniently ignores a whole host of other things a government needs to during its term, like (awkward cough) foreign policy.

For a real comprehensive plan, you need to take a systems view on how to run a country. The GNU agreement does this. Indeed, it is actually a version of the nine medium-term strategic framework (MTSF) priorities. The what?

Ok, let’s start at the beginning.

The country is run on five-year plans (gasps from the back). The idea is that every five years, after an election, the incoming new Administration sets out its strategic objectives for its term. For planning purposes, this five-year plan is converted into a three-year plan, to match the three-year budget cycle.

Every October, in Medium Term Budget Policy Statement (MTBPS), the Minister of Finance sets out a three-year spending framework (known as the medium term expenditure framework, or MTEF) that is aligned to the three-year medium term strategic framework (MTSF). During June/July (i.e., like right now), the Treasury puts out medium term spending guidelines which guide departments in their application for new funds. They do this through running Medium Term Expenditure Committees (MTEC).

So, yes, there you have it: after concluding MTECs, the MTBPS sets out the revised MTEF to achieve the MTSF.

(In English: the October three-year budget aligns three-year spending to three-year priorities that fold into the five-year goals of the Administration.)

It is analogous to a company setting out a strategic vision and then having a budget that flows from it. If used correctly, it a great way to run the country. Here is a great diagram summarising it all. You can diagnose problems, decide what you want to prioritise and fix, drop the sh1t that’s not working, run expenditure reviews. Rinse. Repeat. This is how it is supposed to work and an evaluation of whether it did or not.

The first Zuma administration made one big change to the system. That was to separate planning, monitoring and evaluation from budgeting.

In theory, the idea had its merits. A strong central planning, monitoring and evaluation function housed under the President would be able to better run performance monitoring. The Policy, Coordination and Advisory Services team during the Mandela and Mbeki years had done a great job of trying to get the whole show to aim in the same direction and perhaps this was the natural next step.

Zuma created a fully fledged government department, the dully named Department of Planning, Monitoring and Evaluation. But two things went (in my personal view) wrong.

First, the performance monitoring process and the budgeting process became increasingly separate. It did not help that the Treasury was suspicious of any attempts by the Zuma administration to take over the Budget. Treasury jealously guarded the Budget process, and saw (and still sees) planning and budgeting as inextricably linked.

Budgets are great ways of creating priorities, and spending against budgets is the first line of defence when doing monitoring and evaluation. It creates a beautiful integrated cycle of problem diagnosis → solution → budget → spending → spending tracking → auditing. Rinse. Repeat.

Second, it became a nightmare bureaucracy. The 2019 Medium Term Strategic Framework, i.e. the ‘priorities’, is two hundred and sixty four pages long. 264. It is here if you are interested.

There are 7 priorities, 81 outcomes, 357 interventions and and 561 indicators. And the priorities are not really priorities. They are more fluffy vision statements than priorities.

With so many indicators, it is difficult for the people at the centre to keep track of what is being spent against what.

And, of course, there is no budget attached to it. For that, you need to go to the Estimates of National Expenditure that the Treasury puts out on Budget Day and try and reconcile the 7 priorities, 81 outcomes, 357 interventions and and 561 indicators back to Budget line items in 30 government departments. It is not possible because almost by the design of dear Jacob Zuma, the Budget process is insulated from planning.

Ok, so what now?

The 2024 GNU agreement is basically a version of the 2019 Medium Term Strategic Plan. This makes sense in a perfectly run world, because you start where you ended.

But basically the Ninth (GNU) Administration has just agreed to do all the same things as the Eighth (ANC) Administration.

Also, there is no direct link to budgeted line items. You can derive some of these, for example - the item 11.4 with the fewest words, “lnvesting in people through education, skills development and affordable quality health care”, is basically the combined education, skills and health budget of around R750 billion.

Perhaps it is unsurprising that the DA agreed. In many ways, the agreement is just kicking for touch. It is the equivalent of saying: “We will start with the last Administration’s policy priorities.

All it needs is a good edit and a budget

But it needs a good edit. In the spirit of one government that works together, there are lessons from the Western Cape. It runs the exact same planning process and settled on an easy to communicate and understandable three priorities: Jobs, Safety and Wellbeing. These were the high-level MTSF guidelines. The Western Cape version of the MTSF is a short and sweet 25 pages with lots of clear diagrammes and you can flip through it here. The Western Cape has also run a process to align the Western Cape priorities to the Budget in such a way that it was possible to report to the political leadership on how the Budget aligned to the priority areas, and have difficult conversations about provincial mandates, prioritisation and approach.

(Full disclosure, I was head of the Western Cape Budget Office so I might be a bit biased…)

With that in mind… some editorial ideas:

• Who is the audience? The bureaucracy is around 1.2 million people. This is the team that needs to be aligned around a compelling plan. Is the plan readable by the average nurse or average home affairs official or the average policeman? A easy to remember catchy set of high level priorities. Of course, you could aim for Six Es. Or you could make it a word. Actually anything. Just make it memorable.

• Less tautology. Cut the repetition, remove the repeats, ditch the duplicates. This sentence is a triumph of repeating the same thing over and over: Rapid, inclusive and sustainable economic growth, the promotion of fixed capital investment and industrialization, job creation, transformation, livelihood support, land reform, infrastructure development, structural reforms and transformational change. It is all the same thing.

• More ‘how’. The vision ideas are not bad (I mean who can be against “Rapid, inclusive and sustainable economic growth” ), but like how exactly? (On this, I would start with electricity and state-owned entity reform.)

• Better alignment with the Budget. I have been a Treasury official almost my entire career, and so I am the first to admit my biases… but still I do not quite understand why planning, monitoring and evaluation as a function is so far removed from the Treasury, particularly monitoring and evaluation. It is the Treasury constitutional mandate to have a big army that understands departmental budgets down to nearly the last cent. There are MTECs and spending reviews and policy meetings and robust thinking from all Treasury divisions on big policy questions, mainly with the usual Treasury mindset which is to how to squeeze more output from every rand. So surely, for the love of all things holy, why is the Treasury not in charge of budget monitoring and evaluation? (Yes, I am an ex-Treasury official). [I may have mentioned Treasury too many times in that paragraph].

TL/DR

In short, the process now is to develop a high-level five-year strategic plan that can build towards the three-year Budget and inform successive budget cycles. A concrete and limited set of indicators should be used to measure budget against outcomes.

We have moved on from hippos to GNUs, which are really just wildebeest, but the challenge is the same. The state has been consuming far too much.

Source: DALL-E

In the long years since, the National Treasury had made significant progress in closing the hippo jaws. This is in part due to Mboweni’s decision to freeze government wages - in 2020, the salary bill was rising at an alarming rate and taking up an increasing share of income. The unions were, of course, bitterly unhappy. But without that decision it is almost unimaginable to think where we would be fiscally today.

The hippo jaws are closing

Of course, the long-term solution is to structurally raise revenue, and for that you need growth. Once this has been achieved, expenditure can naturally start trending upwards and all manner of things can be paid for.

But this may take some time. Until then, the government of national unity will need to keep a tight fiscal position.

Both the ANC and the DA are keenly aware of this. The most recent Budget tabled by the Ramaphosa administration stuck to the narrow path of a slow fiscal consolidation, focusing on reducing expenditure as a share of GDP and very mild tax increases. The DA’s Framework for Multi-Party Government, which forms the basis for their negotiating position essentially asks that the Treasury stick to this fiscal path. Indeed, the DA has given the GNU a little bit of wiggle room even - Treasury’s plan is for a deficit of 3.2 per cent of GDP by 2026/27, whereas the DA’s request is for a deficit of 3.5 per cent of GDP.

But the GNU agreement (being hammered out as we speak) is still silent on the how of fiscal consolidation.

Here there are three key principles, that to my mind, will deliver a healthier consolidation:

• Principle 1: In the short-term, education and health budgets should be ringfenced. The fiscal consolidation has been unnuanced and spending on health and education has slowly been eroded. Growth in spending on basic education has risen by 3.9 per cent and health care by 3.8 per cent, less than CPI inflation of 5 per cent. This had long-term implications for service delivery and long-term growth.

  

  Source: Sachs et al (2023, p. 12)

• Principle 2: Smaller state-owned enterprises need to be closed. A key part of the success in China was “grasping the large, letting go of the small”, essentially state-owned enterprise reform that saw smaller, unnecessary state-owned enterprises closed.
  

  In the 2024 Budget Review, Treasury carried a box titled “How state-owned entities have become a drain on the fiscus”, making the obvious points about how SOEs have drained money away from service delivery. SAA has received a total of R48.2 billion over the last six years. More recent example, include Denel getting allocated R3.4 billion, and the South African Post Office R2.4 billion.

• Principle 3: There needs to be a thorough review of the Treasury debt management strategy. With debt levels rising significantly over the past number of years, a number of market participants have highlighted that improved debt management could save significiant interest costs. These include a reducing the long dated maturity profile and better use of cash balances and a less-than-optimal debt structure. This is partly a capacity issue - National Treasury has a small debt management team that is part of a much bigger team that also does state-owned entity oversight. Many other countries have a dedicated Debt Management Office (DMO) at arms’ length from the Ministry of Finance which is staffed by debt experts.

These three simple principles could go a long way to a more effective fiscal consolidation and a happier GNU.

Like any good show, it has a cast of characters. Some are beautiful, some are vain, some are thin skinned, some are smart, and some are not.

It has all the best elements. It also has beady eyed producers (aka News24) ready to pounce on any piece of gossip to put on the show’s promo. Did you know that one of the characters is has been arrested? Gasp! Did you know some of the characters have racist pasts? Eish! Did you know that they all earn more than R100,000 a month. Gosh!

Liminal spaces are empty or abandoned places that appear eerie, forlorn, and often surreal. (From Wikipedia)

Of course, the last season ended with… A cliffhanger! This was quite a clever stunt. In a spectacular crossover, we now have that great innovation from South Africa’s Got Talent: The public vote.

After six relentless seasons, the people at home had, it turns out, got a little bored. Not many people voted. And when they did, they asked for a little more drama.

Like many great shows, the initial premise was great, and the cast was excellent. In the first season, the main character was in a marriage characterised by, what a famous reviewer called, “longings, obsessions and deceits.” They also cast his wife as someone who was, excuse the phrase, drop dead gorgeous. And an individual in her own right. But the last few seasons had got a little tedious. As often happens, the plot lines became increasingly unbelievable. For seasons four and five, in a classic replace-the-main-character-with-a-baddy-trope (this is a sing-along-link), they cast someone who had multiple wives, which confused viewers. One tried to murder the main character. There were some weird brothers from India. The main set, a huge grand opulent building in Cape Town, burnt down. Also, it was plagued by power cuts. So many odd plot lines. It was just too much.

@sophiegsingerPower Cut on Love Island 😭🥹♥️ #loveisland #loveislanduk #loveisland2023 #NewMusic #songofthesummer

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The next reset was to bring in a set of supporting characters from season 1 and set them up as the main characters. But they were not so edgy anymore, and were no longer as young or hot as they could be. Some of the children of the original characters showed promise but were sadly written out. It all got quite tedious and the plot seemed to stall.

We digress.

What shall the next season entail? It starts very soon. How will this cliffhanger resolve?

My idea for the next season is to start with a new plot line. Rather than just a bunch of househusbands and housewives bickering about the quality of the sandwiches, the characters are now all part of running a company, Mzansi (Pty) Ltd.

Turns out this company was there all along. Actually, it was paying for the house, and well everything. Gosh. This is a twist.

The company is in trouble. Its revenues are down. Its expenses are too high. The shareholders are losing money. They are not happy.

In the opening scene of season 7, the shareholder representatives - let us be clear here, the shareholder representatives, not the shareholders - of Mzansi (Pty) Ltd are now in a huge boardroom. They can’t use the company’s actual board room in the family house (remember it burnt down somewhere in season 6), so they have to borrow one of the rooms in one of the houses of their rich cousins in a lovely seaside town.

They are thinking about even having the rich cousins on the executive committee. (This is a bitter pill to swallow, because it is not clear that the rich cousins became rich by being nice to other people).

It seems to everyone that maybe they should focus on getting the company finances back on track. I mean the dividends do kinda pay for everything.

First, the company needs to get its revenues up. It seems they have found common ground on seven of the Operation Vulindlela items: the unbundling of Eskom; the concessioning of ports; the establishment of a water regulator; the implementation of a skilled visa programme; title deed reform to expand land ownership; mineral rights reform; and the rapid expansion of spectrum availability.

(Curiously, both sides are not talking about improving cannabis regulation, which is no longer a priority. Legal cannabis use might help the negotiations, particularly with some of the other cousins.)

Two of the big areas of contention, BEE and NHI, well, perhaps, those are best left for a special few episodes with high ratings somewhere closer towards the end of the season when people start shouting nasty things to one another.

I mean, we need a cliffhanger for the end of Season 7, don’t we?

In the meantime, the viewers are anxious for the show to start up again. Most importantly, the shareholders of Mzansi (Pty) Ltd would like some dividends and the bondholders don’t want to put the company into liquidation.

En nou gaan julle almal huistoe. (and don’t forget to buy my book).

@kyknettn Skielike einde – Die Real Housewives van die Wynlande - S1 - Ep 6 - #kyknet #kyknettv #afrikaanstiktoks #foryoupage #SAMA28 #kykwiepraat

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As a centrist myself, I am quietly hopeful of a centrist solution in the longer run. A proper coalition agreement between the DA and the ANC is possible and probably the best case. Having worked for the centrist factions (I guess) of both sides, there is enough mutual respect and policy overlap for them to find a workable way forward.

But there are enough voices on both sides to not want a coalition, and there a confidence-and-supply system is workable, with the DA supporting appropriation votes and promising not to vote in no confidence votes.

Confidence-and-supply works because Schedule 5 of the Constitution prescribes that the President is elected using a run-off system. However, money bills can only be initiated by the Minister of Finance and passed by a majority of the House. In this scenario, the House selects the President, he (or she or they) in turn selects the Minister of Finance, and he (or she or they) table the next big budget bill (the MTBPS in October).

To get the Bill through, the Minister will need at least 201 votes. Twenty years of working at a Treasury makes me think it will be easier to get a Budget through with the ANC/DA/IFP/FF+/ASA/ACDP/UDM/RISE/GOOD vote coalition (about 290 votes) than with an ANC/EFF/MK group (Around 256 votes). This is because an ANC/EFF/MK budget will have to be a complete rewrite, whereas an ANC/DA/Moonshot Pact budget is pretty much in line with the Budgets that have been passed over the past few years.

(There is a chance, actually, of the ANC vote splitting, and when it comes to things like no confidence votes and Budgets, there is a chance a chunk of the party will vote one way and another chunk the other way. This will be fun.)

There is a good chance it may even be a better Budget - the DA coalition is likely to sommer decline any budget with a cent in it for SAA and a range of other silly SOEs (Denel etc.)

But that is just my two cents, riding on the joy of beating some mates on the ANC vote share. (I also beat our own political analyst, but don’t tell him).

Ok, now that we have a vaguely working government, what should they do?

So whoever takes over will need to start working.

Anyone who has had the pleasure, privilege, pain or unpleasantness of working in a team with me will know that I am a huge fan of the ‘Eisenhower Matrix’, particularly when you are facing a huge number of possible tasks.

The two axes of the matrix are urgent / not urgent and important / not important. Things that you need to do can then be classified as (1) urgent / important; (2) not urgent but important; (3) not important / urgent and (4) not urgent and not important.

The idea is that for type 1 tasks, you must DO. Get them done as soon as possible. For type 2 tasks, you must PLAN, i.e., decide how, when, where and what needs to be done. For type 3 tasks you DELEGATE and the type 4 ones are neither urgent nor important, so need to be binned, i.e. ELIMINATE.

A lot of what goes on in government is neither urgent nor important. There are endless forms to fill in and keep track of, in part because government officials like to feel busy.

For the incoming administration, whatever it may be, the temptation will be to fall into the trap of having endless briefings and meetings about things. I have been in meetings that last five, six, seven hours, and you emerge blinking into the cold brightly lit corridors outside barely conscious of anything that has actually been done.

(Obama actually has this whole little lecture on the fact that doing stuff is important = see it here.)

First off, the fiscal consolidation needs to continue but be more sensible. The fiscal consolidation has been derailed by the SOE bailouts, and the time has come to end that. More money needs to go to education and health, and there needs to be some sensible alignment of education and health with actual population growth. As Michael Sachs has repeatedly said, the Budget is not keeping up with urban population growth (read more here, particularly p. 13).

Second, the coalition (or whatever) needs to be crystal clear on what is happening to Operation Vulindlela. (It needs to be retained obviously.)

Then on a policy front, I have taken each of the six E’s (Eskom, Education, Equality, Environment, Exports and Ethical and Effective State) in my book and categorised them.

DO
Electricity: Push the break-up of Eskom as fast as possible. The Eskom unbundling is critical to the future of a competitive power market. But also, it shows the way forward to reform of other state-owned monopolies, such as Transnet.
Exports: drive the concessioning of ports RELENTLESSLY. Somewhere somehow, the concession of ports has hit a blockage.
Effective and Ethical State: Put in place experienced people (i.e. people who have actually run actual companies) on the boards of the State-owned enterprises and bring back performance related pay throughout the bureaucracy

PLAN
Education: The reform of the education system is quite crucial, but will require some planning.
Environment. Pressing ahead on introducing a carbon market is the logical next step in this area but it is relatively technically complex so needs quite a bit of planning.

DELEGATE
I am cheating a little here, but the one that can easily be delegated is processing of highly-skilled visas. Anyone who has travelled anywhere knows that visas are all done through a global company (VFS) that does it for everyone, so surely it wouldn’t be that hard to accelerate the highly-skilled visa?

ELIMINATE
Of all the policies in the world that we could choose to try implement, NHI is possibly the worst. It is a time sucking idea. I did my honours thesis on a topic within NHI (published here), and then I have been in meetings on NHI since I started at the Treasury (in 2002). I do not understand it. I thought it was just me, but then I recently listened in on a debate with two experts on it, Alex van der Heever and Craig Comrie, on the topic (available here), and was struck that no-one understands it. And reading Nicholas Crisp’s Business Day article on it, I don’t think even he understands it. Eliminate.

Ok ok, I know this is not the first time I have said this, but another area for elimination would be the smaller state-owned enterprises. It boggles the mind that the Treasury still has to bail out of SAA, Denel, Armscor, etc. The serial defaults of these little SOEs are neither urgent nor important, despite midnight entreaties to save SAA. In the book, I talk about the Chinese policy called “Grasp the Large, Let Go of the Small”, where China closed small state-owned enterprises.

Of course, a minority government is what woke India up. The plan is all there, so it just needs to be done.

So here’s some quiet hope for Monday morning.

For the story of how Colombia has changed, we start with two kidnappings.

How else could a story about Colombia start?

The tale of the first kidnapping starts on 14 June 1983.^[1] Alberto Uribe was a successful cattle rancher in the Medellin region. He was quietly spending the day with his son and daughter. Suddenly, fifteen members of the Fuerzas Armadas Revolucionarias de Colombia, a notorious drug cartel known better by its acronym, FARC, stormed the ranch to kidnap him. This was part of a series of kidnappings of prominent and wealthy people often used to extort money. Uribe bravely decided to return fire. Santiago, his son, got a bullet in his lung. It turned out that the lover of Pablo Escobar, the notorious drug lord, was Uribe’s helicopter pilot. She organised a rescue helicopter for Santiago. The daughter escaped to the home of a teacher nearby. But Alberto did not survive. The terrorists shot him and he died from his wounds.

Alberto’s one son, Santiago, went on to allegedly create a hit squad called the “Twelve Apostles” dedicated to killing off members of FARC.^[2] But Alberto had another son, Álvaro. Álvaro dedicated his life to politics, and eventually became President of Colombia, working to rid Colombia of the criminals who had killed his father.

The story of our second kidnapping involves Andres Pastrana, the son of a former president, Misael Pastrana. Andres had built a successful career as a journalist. He was a news anchor for Noticiero TV Hoy, and ran investigations into the Medellin drug cartel. While a journalist, his support of the crackdown on the drug cartels earned him numerous death threats, particularly from Pablo Escobar. He followed his father into politics, and by 1988 was a councillor on the Bogota City Council.

Then, on 18 January 1988, he found himself kidnapped by Escobar henchmen. Many years later, he described the surreal subsequent six-hour meeting he had with Escobar.^[3] At first, Escobar wanted to kill him, but finally, he was assured that his life would be spared provided he didn’t try to escape.

A week later, security forces arrived and freed Pastrano. Escobar escaped into the jungle.

That was January 1988. In March, Pastrana became mayor of Bogota; a decade later he followed in his father’s footsteps, becoming the president of Colombia at the age of 42.

Escobar’s life took a different path; five years after their meeting, he was dead at the age of 44.

But in 1988, at the time of the kidnapping, Escobar was arguably stronger than he had ever been. The economy, riddled with crime and corruption, was in the doldrums. The country was approaching crisis.^[4] A year later, in 1989, with a battered and bruised economy, Colombia was forced to borrow money from the IMF.

A group of Colombian economists became increasingly alarmed about the direction of the economy. They started meeting in a restaurant in Bogota, the Club Suizo. This group, led by Rudolf Hommes, pulled together a plan that they published in March 1990 called "An Economic Proposal for the Nineties" (Una Propuesta Económica para los Noventa).^[5] It became the basis for the economic reform programme of César Gaviria, who was elected President two months later.

This plan, pulled together around a table in a restaurant, was introduced by Gaviria, and made it through Congress in almost one shot, in the course of eight days in January 1991. The year got even better when the Gaviria government arrested and jailed Escobar.

The plan was comprehensive. ^[6] Much like in Rwanda, at its heart was a new Constitution, enacted on 5 July 1991. The Constitution replaced the old 1886 Constitution. It strengthened property rights, but importantly balanced these with state ownership of some resources. It also changed the law to allow for the extradition of drug lords – something which had been prevented in the past by congressmen on the take. The reforms opened up the financial sector, and reduced tariffs and import quotas. Also, the government reduced many distortions arising from labour regulation. Reducing exchange controls also allowed the exchange rate to float more freely than it had before. This allowed exports to be more competitive. An important step was also deregulation of the ports.

A further set of policies were implemented in 1992, many of which followed the Constitution: pension and healthcare reform, the independence of the central bank, decentralisation of government, and rolling back the role of the state in other parts of the economy.

The reforms did not immediately create growth. 1992 was President Gavaria’s año horrible, a “horrible year”. An El Nino drought hit. The power system had not been kept up to date and the electricity company was beset with management problems (sound familiar?) Loadshedding hit, and electricity was rationed for up to eight hours a day.

The government quickly dealt with loadshedding through reorganising the way electricity worked.^[7]

And then in July, Escobar escaped. He had been living in a jail that he had largely built for himself, and when the police tried to move him, his henchmen sprung him.

That said, despite the bad year in 1992, the 1991 reforms created growth.^[8] Between 1991 and 1997, GDP per capita rose 15 per cent.^[9] Inflation fell from nearly 30 per cent to the low single digits, with the fastest declines during the 1990s, helped in part by the new foreign exchange policy.^[10]

In 1993, the life of one of the most famous Colombians of all time, Pablo Escobar, came to a sudden and gruesome end.^[11] Barefoot, he was surrounded by security forces on a lonely rooftop in Medellin, and shot. He had finally been tracked down after being on the run since escaping from prison the year before.

Only 44 years old, he had a fortune estimated at around US$4 billion. In the sixteenth century, the Spanish saw the effects of cocaine; In the eighteenth and nineteenth centuries, the Bolivians might have used it to get their workers to be more productive, but it took Escobar to work out how to become filthy rich from it. It is thought that at one point he single-handedly supplied 80 per cent of the cocaine used in the United States. His was a short but extraordinary life. He had a stint as a parliamentarian and was linked to hundreds of deaths. Perhaps appropriate for someone who started his entrepreneurial career as a seller of tombstones.

And so our story about Colombia is a story about a different type of success. While Bolivia has seen economic growth unlock a significant reduction in inequality, the story of Colombia is that growth brought with it a steady decline in murder rates.

In the early 1990s, the capital Bogota was notorious for being one of the most violent cities in the world. Medellin, the centre of Escobar’s world and the town where his life came to an end, was known worldwide as a place where you could easily be shot on the street.

The years since Escobar’s death have seen a significant change in Colombia. The murder rate is a quarter of what it used to be: it has declined from 84 per 100,000 people in 1993 to 22 in 2020.^[12] In comparison, the rate for South Africa is 33 per 100,000 people.^[13] Colombia is now considerably safer than South Africa.

Over the same period, between 1994 and 2020, the average income per person in Colombia has jumped 10 times.

And so in the space of just less than thirty years, Colombia has transformed from a poor drug-ridden country into a modern, successful and booming one.

This transformation is largely due to the two presidents – Uribe, who lost his father in an assassination – and Pastrana who was freed from the clutches of a drug lord.

Pastrana became president in 1998, and faced an extraordinary set of challenges. Not only was the country once again overrun by drugs[1] , but its economy was also a mess.

He started negotiations with the drug lords, deciding to meet them on their own territory.^[14] Soon after his election, he went on a trip into the jungle. After landing, the pilot and co-pilot of his plane were kidnapped. The president was taken into the heart of the jungle to meet with the leaders of FARC. There, with the most dangerous men in Colombia, in one of the most dangerous countries in the world, they set about negotiating.

Our story of Colombia is thus a story of how getting crime and corruption under control can unlock growth.

Of course, that was the first step. Pastrana implemented a further set of reforms. The exchange rate was allowed to almost free-float in 1999, and full-on inflation-targeting was adopted by the Central Bank in 2001, with a stated long-term target of 3 per cent.

But the Pastrana government never quite got the economy right.

In August 2002, Pastrana was beaten in an election by Álvaro Uribe, the son of Alberto Uribe – the man killed in a botched kidnapping.

Uribe was president for eight years, from 2002 to 2010. His term of office is seen as a period of great reform.^[15] He pressed forward on a campaign to improve security and reduce the role of the drug lords. Between 2002 and 2008, GDP rose from 2.5 per cent to 8 per cent. The war against drugs had largely been won by the end of Ulribe’s term; Colombia was no longer the world’s biggest cocaine producer. Murder rates were down 70 per cent and kidnapping by 84 per cent. 

In many ways, Uribe’s economic strategy was to drive forward the 1991 reforms. He continued opening up the economy, which raised competitiveness.

By 2006, Colombia was rated higher than Chile, Mexico, and Spain in the rankings brought out by the IMD World Competitiveness Yearbook. The impact on foreign direct investment was significant. It rose from around US$500 million in 2002 to US$8 billion five years later.^[16]

The long process to improve peace and security in Colombia led to the Juan Manuel Santos, president from 2010 to 2018 receiving the 2016 Nobel Peace Prize, for ‘bringing the Colombian civil war to an end’.

There were a set of key reforms to deal with violence, crime and corruption. Of course, the one big difference between South Africa and Colombia is that for many years large chunks of Colombia were under the control of paramilitary groups. Some of the things that were done in Colombia include:

1. Restoring control of large parts of the country that were under control of guerilla groups. This included strengthening the military, better civic engagement, negotiations and a Justice and Peace Law to demobilise paramilitary groups.

2. Anti-Corruption Measures. Uribe's administration implemented various anti-corruption measures, including strengthening the judiciary by making it more independent and providing enhanced resources and training; giving the office of the attorney general specialised units and technological upgrades,

3. Transparency Initiatives. Including developing and promoting online platforms for public procurement and government contracting aimed to make these processes more transparent and accessible to the public.

4. Audit and Control Institutions. The Colombian equivalent of the Auditor General is the Comptroller General, and enhancements were made to thisOffice to improve its ability to audit government spending and detect misuse of public funds. Stricter financial oversight and auditing mechanisms were implemented across various government agencies to prevent and detect corruption.

5. Legislative Reforms included new laws and amendments to existing ones were passed to strengthen the legal framework against corruption, including harsher penalties for corrupt activities and better protection for whistleblowers.

6. Conflict of Interest Regulations to prevent conflicts of interest among public officials, including requirements for asset declarations and limitations on post-office employment in related sectors.

7. Public Sector Reforms included merit-based hiring and promotion practices, were implemented to reduce patronage and political interference and ethics training.

Since 2018, Colombia's journey shows a mix of progress and ongoing challenges. The country continues to navigate complex political, economic, and social landscapes while striving to achieve stability, growth, and equity. Without question, we can learn a lot from a country that has made great strides forward in reducing crime and corruption, and used this to unlock economic success.

[1] The kidnapping is described in detail on YouTube at

[2] https://www.bbc.com/news/world-latin-america-35693440

[3] https://www.bcheights.com/2016/04/24/former-colombian-president-fighting-drug-cartel-leading-country/

[4] Edwards, S., & Steiner, R. (2000). On the crisis hypothesis of economic reform: Colombia 1989-91. Cuadernos de economía, 37(112), 445-493.

[5] Hommes, R. (1990), Una Propuesta Económica para los Noventa. Estrategia Económica y Financiera 141.

[6] Edwards, S. (1996), The Political Economy of Incomplete Market-Oriented Reform: The Case of Colombia. Los Angeles: University of California, Los Angeles and NBER.

[7] IRENA and USAID (2021), Renewable energy auctions in Colombia: Context, design and results, International Renewable Energy Agency, Abu Dhabi. https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2021/March/IRENA_auctions_in_Colombia_2021.pdf

[8] Perez-Reyna, D., & Osorio, D. (2018). The Monetary and Fiscal History of Colombia: 1960-2017. University of Chicago, Becker Friedman Institute for Economics Working Paper, (2018-61).

[9] https://ourworldindata.org/grapher/gdp-per-capita-worldbank?tab=chart&stackMode=relative&time=1991..latest&country=~COL

[10] Perez-Reyna & Osoria (ibid).

[11] https://www.nytimes.com/1993/12/03/world/head-of-medellin-cocaine-cartel-is-killed-by-troops-in-colombia.html

[12] https://www.macrotrends.net/countries/COL/colombia/murder-homicide-rate

[13] https://www.macrotrends.net/countries/ZAF/south-africa/murder-homicide-rate

[14] https://www.bcheights.com/2016/04/24/former-colombian-president-fighting-drug-cartel-leading-country/

[15] https://www.concordia.net/newsroom/blog/an-enduring-legacy-president-uribe-and-latin-americas-reform-agenda/

[16] https://www.nytimes.com/2007/09/06/business/worldbusiness/06iht-wbspot08.1.7408847.html

In this one, I talk a little about my holiday to India the reforms in India in 1991, which is an extract from the chapter called “Examples of Success”. That chapter runs through some countries that were well and truly fxcked and how they picked themselves up again. India is an amazing country and a few paragraphs or a blog post barely do it justice. But here goes.

India is an extraordinary case study. Some quick facts:

1. It is projected to grow faster than China over the next few years

2. It has a population of over 1.4 billion and a poverty rate of 12 per cent, meaning that around 170 million people are poor. This is a number that only really hits home when you are actually there.

3. In 1977, the Indian National Congress lost power for the first time 30 years after independence. From then on, they came and went in and out of power, and indeed it was Congress that adopted an economic reform programme in 1991.

4. It was the first big holiday with my significant other.

So this next graph shows us that China grew faster than India between 1980 and around 2022, but that the projections are that India will overtake China in growth for the foreseeable future.

… but if you look at per capita terms it is still “catching up” to China, and indeed still catching up to South Africa. (Of course, this graph tells us something else about South Africa’s economic success, which is that we were richer per capita than China until 2014, and actually growing quite nicely from 1994 to 2009. But, I digress and to understand this you will have to read the whole book.)

So what happened in 1991?

Three years are particularly fascinating: 1947, 1977 and 1991. Well almost every year in India’s history is interesting - it is an extraordinary place. 1947 was, of course, the year India got independence from Britain, Gandhi became prime minister and partition between Pakistan and India took place.

For South Africans, thirty years after democracy, the 1977 Indian elections are quite eye-opening. Those elections were also exactly thirty years after Indian independence. And it was the first time the Indian Congress Party lost power.

But as the book is more about how to unfxck a country, the 1991 economic reform package is the focus.

In 1991 India ran out of money, completely. The economy had been so mismanaged that creditors demanded that the gold reserves of the country be handed over physically. The Indian government had to transport forty-seven tonnes of gold to London, and twenty tonnes to Switzerland. And not only that but, as we are told by Y.V. Reddy, the Governor of the Indian Central Bank from 2003 to 2008 and an official at the Bank in 1991,^[i] on the road to the airport, in the middle of the night, the truck transporting the gold burst a tyre. Petrified by what might happen, armed guards surrounded the truck, which now stood marooned in the street. Finally, the tyre was fixed, and the gold was safely taken abroad. For many, this moment – when the gold reserves of India were being furtively removed from the country in the middle of the night – represents one of the lowest points in India’s long and complex economic history.

The year 1991 also marked a low point in the political history of the nation. On 21 May 1991, Rajiv Gandhi was assassinated in a suicide bombing. Gandhi had been prime minster from 1984 to 1989. He was the son of Indira Gandhi, prime minister before him until she was also assassinated, and the grandson of Jawaharlal Nehru, India’s first prime minister after Independence. The death of Nehru’s grandson was a deeply distressing moment.

The 1991 crisis had been a long time in coming. In the years before 1991, India had been spending significantly more than its tax revenues. India’s fiscal deficit was 8.4% of GDP. Government debt ballooned. Imports also significantly exceeded exports, leading to a current account deficit. These ‘twin deficits’ left the country vulnerable to a shock. And soon the shock came. In 1990, Saddam Hussein invaded Kuwait, thereby triggering the Gulf War and, with it, a tripling of the oil price. In turn, the United States went into recession, as did all the main oil-importing countries. India’s foreign exchange reserves plunged and soon it was deep in debt. The only way India could meet its obligations was to pledge its gold to its foreign creditors. And so the gold had to be sent to London and Switzerland, in a truck that burst a tyre.

Unsurprisingly, this deep economic crisis had led to end of the dominance of the Indian National Congress, known to most as the Congress Party of India, the party of Mahatma Gandhi and Nehru, which had run India for the majority of the time of Independence in 1947 until they lost the 1989 elections. Not for the first time in history, a liberation party found itself out of power because of bad economic policy.

It was the elections in 1991 were an extraordinary turning point. In 1991, the Indian National Congress scraped 36% of the vote. It managed to put together a minority government.

Manmohan Singh, the new Minister of Finance, was faced with a daunting list of things to do. He decided to stop trying to prop up the value of the currency, the Indian rupee. At first it plunged but then stabilised. A year later, a dual exchange rate system was put in place, and from March 1993 the exchange rate was allowed to find its level more freely in a ‘managed float’.^[ii]

But it was the reforms to the red tape in which India was tied that made the real difference. The pre-1991 India was known as ‘the Licence Raj’.^[iii] Before the great reforms, if you wanted to do anything, you needed a licence. There were up to eighty different government agencies involved in issuing permits and approvals. Imagine dealing with so many bureaucrats – and, of course, imagine the possibility of one or two of them demanding a bribe to make things happen faster. The more laws and regulations you have, the easier it is for the system to become corrupt.

The complexity of the system, which had tied up everyone in knots, was gradually unbound. The economy was also freed in other ways. Tariffs were reduced.^[iv] Until then, the average tariff in 1990 was 56%, though the maximum was as high as 535%. Most goods had a tariff of 100%, doubling the cost to the end consumer. Before 1991, India had a list of items that specified what could be imported. The new rule was that anything could be imported, except for dangerous goods. This simplified trade significantly. At the same time, rules prohibiting foreign investment were scrapped, and foreign direct investment was encouraged in high-technology and high-investment industries.

In addition, the government announced a new industrial policy on 24 July 1991, which deregulated industry and rolled back the Licence Raj.^[v] Licensing was abolished in an estimated 80% of industries. The need for prior approval to expand or diversify businesses was removed. Restrictions on the industries in which private companies could operate were reduced. As for publicly owned entities, shares in them were sold off. Much as in China, more autonomy was given to existing public sector enterprises to make for less political interference.

The results have been extraordinary. Dismantling the byzantine and archaic world of the Licence Raj with all its restrictions and confusions, as well as opening up India to the global market, quickly unlocked rapid economic growth. The idea was for the government to step back from meddling in every part of the economy, and to allow Indian businesses to find their own comparative advantage in the world. Here the parallels with China are obvious. As a result India has become a major trading hub for the world.

The effects of all this on the Indian citizenry have been spectacular. From 1991 to the present day, income per capita in India has increased by 350%. Between 1980 and today, the average Indian citizen has gone from earning $1,500 to $6,800 per annum. Gurcharan Das, an Indian author and businessman, has described the great sweep of reforms in the 1990s as ‘though a second independence had arrived: we were going to be free from a rapacious and domineering state’.^[vi]

As we have seen, strong finances were key to India’s growth. The country had run out of money but once that problem was fixed, and an economic reform programme was put in place, many of the other problems that India faced could be .worked on.

The reforms were not all good

The reforms laid the foundation for rapid economic growth and global integration, they also brought challenges that have persisted or evolved over time. This included a widening of the urban-rural divide. Travelling through India, the sheer number of people in urban areas is mindblowing and the cities are buckling under the strain of rapid growth and development, while rural areas have been left behind, leading to significant disparities. Spatially this holds true too: states with better infrastructure and institutions (like Maharashtra, Karnataka) attracted more investment compared to less-developed states, exacerbating regional disparities. And, of course, the rise of a wealthy corporate elite increased the wealth gap, with benefits of economic growth not equally distributed. I come back to this conundrum in a separate chapter on Equality, but for now it is important to flag this issue.

But, the bottom line…

Not to give away that chapter, but, in my view, the impact on poverty overwhelms the impact on inequality.

In 1993-94, the poverty rate was approximately 45.3% based on the national poverty line (Tendulkar Committee Methodology). By 2011-12, this figure had fallen to about 21.9%, according to the same methodology.

In 1993-94, around 407 million people were below the poverty line. In 2011-12, this number reduced to about 270 million. Thus, the decline from 1993-94 to 2011-12 translates to roughly 137 million people moving out of poverty.

Ah yes, I did promise some holiday snaps - looking lonely at the Taj Mahal.

[i] Y.V. Reddy (2018). Advice and dissent. New Delhi: HarperCollins India.

[ii] I. Patnaik and A. Shah (2012). Did the Indian capital controls work as a tool of macroeconomic policy? IMF Economic Review, 60 (3), 439–464.

[iii] S.W. Sanders (1977). India: Ending the permit-license Raj. Asian Affairs: An American Review, 5 (2), 88–96.

[iv] Intermediate goods had tariffs of 146.4%, capital goods 107.3%, consumer goods 140.9% and manufacturing goods 107.3%.

[v] India before 1991 website, the 1991-economic-reforms

[vi] Gurcharan Das (2000). India unbound: a personal account of a social and economic revolution. New York: Knopf.

The book is called How to Fix (Unf*ck) A Country: 6 Things to Reboot South Africa.

My blog subscribers will recognise a lot of what is in the book, indeed I tried out many of the big ideas in blog posts and your feedback helped a lot to refine what was going on.

In the next few months you will be getting expanded versions of each chapter. Sort of the director’s cut - the book itself is a slim 200 pages thanks to an excellent team at the publishers and two super duper editors that drove me to Hemingwayesque levels of writing. So I will use this blog to expand a bit a bit on each chapter and drag back the pre-edited things.

I love economics and I love how people like Steven Levitt, Malcolm Gladwell, James Robinson, Russell Bregman, Johan Fourie and others have made intellectual books accessible (and sometimes fun). So, the idea is that the book tries to be a story book, something that you can pick up and read and kinda maybe even enjoy? The medium is meant to be an accessible one, so that it conveys an important message.

But most importantly, I am like deeply worried about the persistent lack of economic growth, and quite angry about the slow pace of reform, so a large chunk of the book is about me writing down things to manage my worries and anger.

Ja, ja, ok, what is the book about?

There is a quote that has never quite left me. It is famous, and I use it to start the book. (It has launched a thousand articles, textbooks, talks and books on economic growth).

Is there some action a government of [South Africa] could take that would lead the … economy to grow like [India’s] or Indonesia’s? If so, what, exactly? … The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.

The quote comes from a 1988 paper by Robert Lucas called ‘On the Mechanics of Economic Development’.

Clever economists will know that the quote originally reads a little differently, to whit:

Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly? If not, what is it about the 'nature of India' that makes it so?

The India/Indonesia/Egypt thing no longer makes sense, which is itself a whole story. India is one of the booming economies of the world. India has taken action - basically they read Lucas’ article - something that I explore in a little bit of detail in the book. And, of course, to hold up Egypt as a case study may have made sense in 1988, but a decade later, in 1998, the story was quite different. And today, well, today Egypt is in a pickle. Indonesia is interesting in its own right and deserves its own blog.

And so the book follows Lucas’ lead and tries to answer to simple questions:

• Why are some countries so much more successful than others?

• How can we get South Africa to be one of the successful ones?

I wasn’t allowed any graphs in the book (I snuck one in), but if you play around on Our World in Data here, it is fxcking mindblowing how different the economic trajectories of different countries can be. I gooi some of these into the introduction.

It only underscores the point that some people live in countries that are successful. In these countries, average income is relatively high and distributed more or less equally. Few live in poverty. Health care is available. Education is of good quality. There is a plan for climate change.

Others live in countries that don’t work. Perhaps their incomes aren’t as high, or perhaps some people are very rich while others are very poor. Health care is weak. Education is expensive. They are at the mercy of climate change – they have neither a plan to slow it down nor a plan to deal with its effects.

There is a foreword by former boss, Tito Mboweni, and then there are ten chapters. The first three are introductory. The first one just sort of sets the scene for why this is so fascinating (basically what I have just said in this post), the second one takes a tour of some economic success stories from around world and the third one looks at a methodological framework through which we can think about growth.

Then the next six look at the six areas that I think we should be prioritising: Eskom, Education, Environment, Exports, Equality and Ethics.

And then there is an Epilogue, which grapples with why it takes us so long to get anything done.

I will use forthcoming blog posts to dig into each chapter. I will even have a post about the Foreword (which is a story in itself)…. and some random ones along the way.

One particular one - which is what I get asked a lot - is South Africa f#cked? I will answer in a little more detail in the post, but my short answer is ‘no.’ Indeed, my research into other countries suggests quite the opposite. We are nowhere near the economic crisis (yet) that India faced in 1991, nor we staring widespread devastation in the face and being locked out of the world economy (which pretty much describes Vietnam after the war).

A second one is - also a questions that comes up a lot - what did I miss. The answer to this is the water crisis, and I will have a post about that too, don’t worry.

I look forward to the journey of chatting about my book here on Substack. I will also post all the various reviews (good and bad), the podcasts and all the other media that goes along with these like this when you have an awesome publisher like Jonathan Ball.

In the meantime, feel free to order a book or better yet, come to one of the events - the book launches offer free wine!

RSVP asseblief, mainly so that we have enough booze:

Suidooster Festival, Artscape Cape Town, 28 April 10:00 in conversation with Dennis Davis and Tessa Dooms. The blurb is such gorgeous Afrikaans that it is worth repeating here: Staatskaping het Suid-Afrika laat shut down. Maar hoekom kan niemand ons reboot nie? Ons is immers nie die eerste land wat homself in ’n penarie bevind nie. Andere kon uit die puin herrys, terwyl ons in die as bly ploeter. Roy Havemann, hoof van ’n internasionale navorsingsmaatskappy wat gekonsulteer word deur private maatskappye en die Wêreldbank, sê die antwoorde skuil in ses dinge: Eskom, opvoeding, die omgewing, uitvoere, gelykheid en etiek. Kom luister en praat saam.

Rosebank Exclusive Books, Johannesburg, 16 May, 18.00 in conversation with Hilary Joffe

V&A Waterfront Exclusive Books, Cape Town, 21 May, 18.00 for 18.30 in conversation with Twanji Kalula

And the one in Cape Town

Cool, so let’s see how it goes and looking forward to the discussion on economic success.

So obviously, the Rugby World Cup has dashed all other ideas out my head. So here is an attempt to say something about rugby and the economy.

(And don’t worry, there will be a long post with lots of numbers about fiscal policy just after the MTBPS).

Right, here goes.

How come some countries are better at some sports and rubbish at others?

Football – soccer – is played by 275 million people. There are 211 countries that are members of FIFA, the Fédération Internationale de Football Association. Four countries out of 211 have won 16 World Cups between them. Brazil has won five times. Germany and Italy rank joint second, with four titles each. Argentina, winners of the 2022 tournament, have won three World Cups.

There is something special about those countries that makes them naturally good at football. It can’t be anything about the people – Germans, Brazilians, Italians and Argentinian are all very different people. It is, once again, about the institutions and systems that create the environment that makes them just have a comparative advantage in football.

They didn’t naturally become good at football. It was a process of learning, understanding and improving.

While rugby is played by a smaller group of countries, it is still dominated by a few. South Africa, with four Rugby World Cups, yes four; the people that shall not be named with three; and then some others. I forget their names.

We didn’t just become good at rugby. We do have some natural comparative advantages. As a very physical sport, rugby favours bigger guys. Johan Fourie, Kris Inwood and Martine Mariotti have done some fascinating research showing white South Africans have always been very tall - closely related to our not so nice history. There is some evidence of convergence as incomes slowly improve

Then there is the full rugby value chain – a strong culture of school rugby , university rugby, competitions – all of which are designed to pick up outstanding players as quickly as possible and groom them. Of course, Siya Kolisi is one of them.

What lessons can we take from something we are clearly good at (rugby) for something we are not so good at (the economy)?

Just as some countries are good at some sports and not at others, some countries are naturally good at making some things, and others at good at making others.

That’s obvious. But there are two tricks.

The first is to focus on what you are good at (your comparative advantage) and then to relentlessly aim at getting better at it. The second is to jump from one thing you are good at to other things – diversification - which is to add to what you are good at.

Let’s start with the first. What is our comparative advantage? The data show some unsurprising things: Daan Steenkamp over at Codera shows that our revealed comparative advantage is in basic commodities. Gold, platinum, diamonds, iron ore and coal together make up a third of our exports. In agriculture, we export citrus fruit, corn, grapes and wine. We are the third biggest exporter of wool in the world, with over 80% of our wool exports going to China. This is our business model.

South Africa’s gross exports are dominated by metals and ores

Source: Harvard Kennedy School, Atlas of Economic Complexity

The reasons for this are largely historical – our great economic jumps forward have all been related to discoveries of minerals: diamonds in 1867 and gold in 1886, both of which led to amongst the largest gains in per capita income in South Africa’s history. Over the years, capital intensive industry has relied on cheap electricity plus generous tax rules and other incentives.

Are we focusing on becoming relentlessly better at these thing? Not really. Our mining policy has hardly focused on improving mining exports.

And here, dear reader, is the core South African challenge. We are not naturally good at things that absorb large numbers of the unemployed.

The temptation is to think that “beneficiation” is the answer – that it would be best for us to add value to things that we currently export (like gold and platinum). But this misses that point that the economics of beneficiation rely very much on what makes sense.

Take wool. It might seem obvious that the world’s third largest wool producer should try become “move up the value chain” to make, say jerseys and wool clothes. But the things that make us good at wool production – lots of sheep spread across vast tracts of empty land in the Karoo – do  not make us good at knitting. They make us good at lamb and sheep. Not knitting. And so the better move is to jump into high-end lamb production, and try and create a name for ourselves in producing high-end trademark protected lamb, exactly what agricultural economist Wandile Sihlobo recommends.

Similarly, countries advance by progressing naturally to things that are related to what they are good at. In mining, South Africa has not developed into a manufacturer of gold jewellery. This is because jewellery manufacturing is something best done right at the consumer – the huge Chinese and Indian jewellery markets rely on consumers designing and picking their jewels right there.

Rather focus on complementary things. David Kaplan, former chief economist at the then Department of Trade and Industry, and now a professor of trade at UCT, shows that South Africa has become remarkably good at mining equipment. Other research by Simon Roberts, also a former DTI chief economist, and others shows that is the types of firms that do this are mainly mid-sized local companies that are super specialised in particular things - underground and surface mining equipment, off-road equipment, mineral processing, and material handling.

Why mining equipment? It is obvious. Mining is really complicated – and you need to work out how to do it right there and then. You can’t wait to bring in new machines from elsewhere – you have to build them yourself where you are mining. On the back of this, South Africa has developed a respectably sized mining equipment export cluster.

Mining equipment is exactly the type of export that we should become even better at, catapulting us forward to being an industrialised nation.

That takes us back to the rugby example. We are naturally good at certain sports that we have built a strong pipeline of skilled players.

We need to pick a lateral expansion. And take lessons about not choking from one sport to another.

So our best move is to win the Cricket World Cup next.

My next blog post is another lesson from a small place: this time in rural Eastern Cape.

Along the famously beautiful Wild Coast is an Early Childhood Development Centre near the village of Bulungula. The famous tourist town of Coffee Bay is a short hike away along the spectacular coastline. Here you will meet two people you might be surprised to find in such a deep rural area: Réjane Woodroffe and Dave Martin. They are both trained economists – Réjane was previously the Chief Economist and Head of International Portfolio Investments for Metropolitan Asset Managers and a research analyst for the US investment bank, Merrill Lynch, in the economics and fixed-income sales and trading departments. Dave is a University of Cape Town graduate with an undergraduate degree in finance and an Honours degree in accounting.

But for now we want to talk about what these two economists have observed about the population of the area. If you tour the early childhood development centre, you will hear that it is not as overcrowded as it used to be. At one stage there was talk about having to build more than one centre, but that is no longer the case.

How is this so? Well, if we look at the Statistics South Africa numbers (imperfect as they may be), the story is shown in numbers.

Bulungula is in the Amatole district, and the number of children under the age of 10 has been rapidly declining. StatsSA estimates that in 2002 there were 215,000 children in this age group. By 2019, it was down to 185,000. There is an interesting little surge in population around the 2011 mark and then the under tens start declining again.

Census 2022 showed that there were 164,770 under 10s in Amathole, just over 20,000 fewer than in 2019.

The Census data may not be that accurate, but we have other much more accurate sources of data: births, deaths, enrollments in school and hospital visits.

Starting with school children. We have reasonably accurate numbers for school-going children (these numbers should be better, but they are ok). National Treasury publishes the number of school-going children by province in the annual Budget Review. In 2022, there were 1.824 million schoolchildren in the Eastern Cape; down from 1.9 million in 2012.

Primary health care visits are another measure that the Treasury publishes. In 2012, there were 17,968 health care facility visits in the Eastern Cape, versus 13,322 in 2022 or a full 25% fewer visits. Hospitals that were once bursting are now just very full.

This is a result of two things – first, the overall slowing of population growth in South Africa. This is because, despite the tough past several years, South Africans are richer and more educated than they were fifteen years ago. Higher incomes and higher levels of education are associated with smaller family sizes. The number of births each year has fallen from a peak of around 1.7 million in 2003 to less than 1.1 million in 2022.

Second, there has been rapid migration to the economic centres – particularly into Gauteng and the Western Cape. This is causing the population of the Eastern Cape to stagnate. Census 2011 estimated the Eastern Cape population to be 6.6 million, and Census 2022 puts it at 7.2 million, growth of less than 1% a year. Over the same period, the population of Gauteng grew from 12.3 million to 15.1 million, growth of 2.8 million or nearly 3% a year. The population of Gauteng is thus growing nearly 3 times faster than the population of the Eastern Cape.

From China, we learn the lesson of how to ride the “demographic dividend”. This is the natural impetus one gets from a change in the relative population growth rate. If there is an abundant supply of labour, and prices can adjust, this can support economic growth. The important thing is that the price of labour has to be appropriate – i.e., not kept artificially high – and that the labour force needs to be reasonably well-educated or have the right skills for an urbanising economy.

Almost all the success stories in the world involve a period of rapid urbanisation, with this urbanising population finding economic opportunity. In doing so, they in turn created their own demand for goods and services, creating a “virtuous cycle” of an urban middle class.

When the working-age population grows faster than the elderly population, there is a natural window of opportunity. In China, this window opened in roughly 1980 and stretched to around 2010. Across that thirty-year period, the number of working-age people rose from about 550 million to just over 900 million. At the same time, the number of elderly (called the dependent population) stayed roughly constant.^[ii]

In Japan, and other advanced economies, the opposite is happening – the elderly population is growing faster than the working age population. This is putting extraordinary pressure on the social system, and consequently on the economy as a whole because this elderly population is leaving the workforce and living longer.

Similarly the South African population is also aging, but we still have one of the highest shares of youth relative to old population. The slowing birth rate will only over time start to impact the population dynamics.

South Africa faces a unique moment in our history – unlike many other countries we still have a young, vibrant population. It is crucial to ride this demographic dividend as best we can in the time we have available. 

[i] An excellent source pulled together by the University of Cape Town, collating all the data available on children, is available at http://childrencount.uct.ac.za/index.php

[ii] Fang, C., Garnaut, R., & Song, L. (2018). 40 years of China’s reform and development: How reform captured China’s demographic dividend.

Where is the best country in the world for solar power? Our neighbour, Namibia, aka Nambia.

And so unsurprisingly, the Northern Cape comes very close to being one of the best spots for solar electricity, particularly those deserty and desolate parts near in the northern parts of the Northern Cape. The Northern Cape is also home to the largest wind farms in the country. The Khobab and Loeriesfontein twin wind farms make up a combined 122 wind turbine generators and power 240,000 homes.

This unlocks a huge opportunity that the new world of renewable energy provides us . Cheap energy. It turns out, as Ricardo Hausmann from Harvard has pointed out, that the economics of transporting dirty energy versus clean energy are very different.

Both oil and coal are “energy-dense”. That means that each kilogram of coal and each barrel of oil holds a lot of untapped energy.

The costs of shipping oil and coal are very small compared to the cost of the oil and coal itself. It is therefore cheap to move a ton of coal or a barrel of oil from a mine in South Africa across the world to China where it can turned into electricity to manufacture goods.

The Paris Agreement together with carbon taxes being introduced across the world makes it more and more expensive to use oil and coal for energy. This means that the economics of manufacturing change quite significantly.

Moving solar and wind energy is much more difficult than moving oil and coal energy. One option is to produce “green hydrogen” through electrolysis powered by wind and solar. During periods of down time, the carbon-free green hydrogen can be burnt to produce energy. This is a good way of storing renewable energy and using it at times when the wind doesn’t blow or the sun doesn’t shine. It is also possible to move the hydrogen and burn it elsewhere - the easiest is by ship.

So you need a cheap way of producing it and a port to move it.

There are two big opportunities for South Africa. The first is to manufacture green hydrogen for export. The second is to attract energy intensive manufacturing to South Africa.

The story of the first option is the little town of Boegoebaai in the Northern Cape. It is perched on the very northern end of South Africa’s long western coast close to the town of Port Nolloth in Namaqualand which has a famous weather station. It is (in relative terms) close to Alexander Bay, where the mighty Orange River pours into the sea.

The story of Port Nolloth is a wonderful metaphor for how the shift towards green energy offers huge opportunities.

Port Nolloth was founded in 1854 as a port for exporting copper. At the time, Namaqualand was a huge source of copper deposits, and during the late 19th and early 20th centuries, it was a significant mining area.

The copper was gradually exhausted, and the town started to decline.

Then in 1925, something remarkable happened. Jack Carstens, the son of a storekeeper who was also the local Reuters correspondent, was exploring the Oubeep farm, south of the port, when he picked up a shiny lump of rock. News of this discovery – the first diamond found on the Namaqualand coast, spread quickly thanks to his father and his newspaper connections. The discoveries quickly followed. Robert Kennedy an experienced prospector, was swimming in the cold sea and looked up to see a diamond-bearing rock. There were fourteen diamonds on the site. And then another prospector – Solomon Rabinowitz – was scratching around mouth of the Orange River. Hidden among the oyster shells, he found 334 diamonds. Clearly, there were rich pickings to be had and by 1926 the mining rights to most of Alexander Bay had been snapped up.

This became one of the most significant diamond producing parts of the world but just as the copper ran out, the diamonds also started to run out and so the area became less important.

But now, the Port has a new opportunity in the form of renewable energy which could become South Africa’s next copper or diamond boom.

Green hydrogen needs to be manufactured using green energy. It can then be transported to other industrial parts of the world on ships and used to create green energy there. In many ways it is like coal – in that it is a source of energy, but green energy.

Boegoebaai is emerging as a prime location for green hydrogen production. What sets Namaqualand apart is its abundant renewable energy resources, with plentiful sunlight and consistent wind patterns. These attributes make it an ideal candidate for renewable energy generation, specifically through solar and wind power, which can be harnessed to produce green hydrogen via electrolysis. This process allows for the clean separation of hydrogen from water without contributing to greenhouse gas emissions.

Given the growing global demand for clean hydrogen as a sustainable energy source, this location's accessibility to export routes is a significant advantage.

The Northern Cape, historically less industrialised, stands to benefit from job creation and increased economic activity resulting from these initiatives. The hydrogen produced could be a valuable asset for energy-intensive sectors like mining and industry, aiding their transition toward cleaner energy sources and reducing carbon emissions.

In line with global efforts to combat climate change, the South African government's support for green hydrogen development reinforces Boegoebaai's status as a promising hub for clean energy projects. As technology and infrastructure continue to evolve, Boegoebaai may play a pivotal role in South Africa's contribution to a sustainable and low-carbon future.

While our first opportunity is to export green hydrogen to the rest of the world, the second one lies in energy-intensive manufacturing. For industrial manufacturers that need vast amounts of electricity, the solution is to move close to the sources of electricity. And here South Africa is near the top of the list. If we create a reliable and cheap way for big manufacturing companies to acquire energy, we can transform our manufacturing base. We already have potentially large pools of unskilled labour, and matched with renewable energy this can be a game changer.

This means huge probable changes in global manufacturing value chains. With the right nudges and the right incentives, it may be possible for new industries to be formed in South Africa.

One such option is around the deep-water port of Saldanha Bay located on South Africa's west coast which has a rich history dating back centuries. Portuguese explorer Vasco da Gama first landed there in 1497, marking its discovery. However, it was the Dutch who established a more significant presence in the 17th century during their colonial expansion. Saldanha Bay was initially considered as a potential harbour due to its strategic location and much deeper waters, but the Dutch ultimately decided against its extensive use. It was a much safer port than the notorious Table Bay in Cape Town, originally named Cape of Storms by Portuguese explorer Bartolomeu Dias which was the scene of many shipwrecks.

One of the main reasons the Dutch chose not to make Saldanha Bay a major port was because of a lack of freshwater which is crucial for both sustenance and ship maintenance during the long sea voyages of that era. Instead, the Dutch favoured Cape Town, which had a more reliable water supply and better conditions for supporting their maritime endeavours. Consequently, Cape Town flourished as a colonial port while Saldanha Bay remained a secondary option for occasional anchorage and limited maritime activities.

Today Saldanha Bay has fresh water, a deeper port and easy access to enormous amounts of cheap solar and wind electricity. The West Coast is one of the best parts of the world for wind power, and the nearby northern Cape is one of best places in the world for solar.

Saldanha is also a possible place in which to manufacture green hydrogen – the advantages of being close to endless supplies of sun and wind make it a prime location.

The fire, the wind and the sun

So the story of climate change is how we move our source of energy from carbon, which creates pollution, to the wind and the sun which does not.

For South Africa, one of the sunniest countries in the world, climate change is not something to fear.  How we confront it creates both new and significant opportunities.

The story of Port Nolloth is in many ways the story of the South African economy.

First, agriculture, then copper, then diamonds, and now green hydrogen. The copper needed new technologies to be imported to drive their growth; similarly, the diamonds needed new technology.  Our history has been built on using our resources – this time, however, we should use our resources wisely in a way that benefits everyone.

Where? This blog won’t give you a straight answer because it is not immediately clear that there is that sort of cash lying around to be borrowed. I told you the story of my roadtrip to London - there isn’t much interest in South Africa overseas, so there isn’t much appetite for debt.

But let’s have a look at where Treasury might be able to borrow.

First, how much? A lot. At the time of Budget 2023, National Treasury estimated three-year borrowings of around R1.5 trillion. Krutham’s latest forecast is more like R1.9 trillion. (R1.8585 trillion to be precise). I told you it is a lot.

Gross financing requirement forecast: 2023/24 to 2025/26

Source: Krutham, National Treasury

This translates into an average gross financing requirement of 8.1% of GDP over the next three years. Where will Treasury find an additional ZAR283bn to borrow from, over and above the already quite significant ZAR1.5tn they have pencilled in to raise over the three-year fiscal framework? We look at different buckets of money and conclude that it will be difficult.

Gross financing requirement forecast, by category: 2023/24 to 2025/26

Source: Krutham, National Treasury

This translates into an average gross financing requirement of 8.1% of GDP over the next three years. Where will Treasury find an additional ZAR283bn to borrow from, over and above the already quite significant ZAR1.5tn they have pencilled in to raise over the three-year fiscal framework? We look at different buckets of money and conclude that it will be difficult.

Government debt in perspective

South Africa’s debt can be put in perspective in comparison to the domestic savings base. In Figure 4, we compare total net debt to various pools of capital. Note that the various pools cannot be aggregated – some pension funds hold units in collective investments schemes and banking debt. Collective investment schemes, in turn, hold sovereign debt. We only show the size of the various pools of capital individually.

Nevertheless, immediately, it is apparent how large gross debt is now relative to the various pools of capital. Gross debt is ZAR4.8tn, total private credit extension is ZAR4.5tn, and the total size of the private pensions system is ZAR3.5tn. South Africa’s debt cannot be absorbed by any one of these savings pools.

South African capital markets are deep, but not that deep

Source: Krutham, National Treasury

Ownership of domestic debt is spread out over these different pools (and again, we highlight that there is double counting). We look at the spread of ownership in the next few sections. Then we look at foreign appetite for bonds, before concluding with some observations.

Who owns ZAR bonds?

We dig into this question from two angles – first, who owns the bonds currently? Second, how much spare capacity do they have?

Who owns bonds at the moment?

There is detailed data available from the central securities depository, STRATE, on holdings of ZAR denominated bonds by major type of asset owner. There has been a noticeable decline in foreign holdings – expressed both in relative terms and in absolute terms. In relative terms, non-residents have reduced their holdings from 41.4% in 2017 down to 25.6% as at end 2022.

The relative slack has been taken up by other financial institutions – mainly collective investment schemes (known also as “unit trusts” or “mutual funds”), while the share of bonds from local pension funds has declined.

In the next sections we look at each of these in detail.

Foreign appetite for ZAR bonds has declined, with banks and other financial institutions taking up the slack

Source: National Treasury, STRATE

With the notable exception of the long-dated 2040, foreign participation is toward the short end

Source: National Treasury, STRATE

Non-resident appetite

Non-resident holdings of ZAR debt have declined in relative and absolute USD terms Current appetite for ZAR bonds appears to be weak. In addition to the fall in relative terms highlighted above, it is noticeable that the holdings by non-residents of South African debt have declined in US$ terms. (The rise in ZAR terms naturally reflects the significant depreciation of the exchange rate.)

Holdings of ZAR denominated bonds by non-residents have declined in US$ equivalent

Source: National Treasury, STRATE

South Africa is expected to issue more (as a percentage of GDP) than peers. A key concern for capacity is South Africa’s issuance plans relative to other emerging markets. The IMF (which has a more bearish view on debt plans than us) forecasts that South Africa will need 6% of GDP in 2024 and a similar amount every year until 2028. (This is net lending/borrowing by general government, a different way of calculating than the gross measure we use above).

South Africa’s borrowing requirements are larger than peer EMs, with the exception of Brazil and India

Source: IMF, Government Finance Statistics, IMF. EMDE = Emerging market and developing Economies

The IMF forecasts that with regard to net borrowing South Africa will need more than the EM average, and more than many other peers, with the notable exception of fellow BRICS members, Brazil and India. Given South Africa’s more significant financing needs, it is unlikely that that the offshore bondholders will have appetite for increasing their weightings of South African debt relative to other emerging markets,

Domestic bank capacity

Banks are large holders of government debt. The next place to look at potential capacity is naturally the domestic banks, which are already large holders of domestic debt. South African banks are well capitalised, reasonably profitable and have reasonably large balance sheets relative to the sovereign. Moreover, the regulatory requirements encourage holdings of risk-free government debt (for now).

The share of banks’ assets in sovereign debt has risen since 2008

Source: SARB BA900

Bank capacity is increasingly stretched. While banks are required to hold short-term debt for regulatory purposes, all banks are now comfortably ahead on the liquid coverage ratio (LCR). A Sarb working paper estimates that South African banks are comfortably in excess of their liquid asset requirements. High quality liquid assets (HQLA) have increased by 142% between January 2015 and May 2021. They estimate the Net Stable Funding Ratio and LCR ratios to have been comfortably met, suggesting that there is not much additional appetite for additional short-term debt for regulatory purposes. This is borne out by the stable ratio of the share of bank assets in relatively short-term debt.

Government securities have recently become less attractive relative to government bonds

Source: SARB BA120

Sovereign debt is increasingly unattractive. As the repo rate rises, banks earn more on gross loans and advances (most of their lending book is variable rate, whereas most sovereign debt is fixed rate) unless, of course, yields on government debt rise or floating rate notes (FRNs) are expanded. We can see this in Figure 9, which calculates a naïve effective return on loans and advances versus an effective interest rate earned on sovereign bonds. The sovereign bond earning potential is much less interest rate sensitive – fixed rate instruments by definition are, well, fixed rate, while lending activities are variable rate. This may change as the top of the interest rate cycle arrives – bond prices will rise, and bonds may become relatively more attractive again. 

New capital buffers may also discourage sovereign bond holdings. Banks on the internal ratings-based approach (the IRB approach) have seen increased risk weights for sovereign exposure up to 10%. This follows higher public debt and weakening credit ratings. Bond valuation may also become more volatile. There is also the risk of a sovereign-bank nexus similar to that of Silicon Valley Bank where there are large valuation losses. (The IMF estimates that the four larger banks mark-to-market about half of their government bond holdings).

Thus, while there is balance sheet capacity, there is likely not to be risk capacity. With total holdings of sovereign bonds reaching 16%, and concerns about mark-to-market losses arising from onward rises in yields, bank capacity is increasingly stretched.

Moreover, crowding out is a very serious risk. As issuance increases (and yields rise), banks will find sovereign bonds attractive, and more attractive from a profitability perspective than lending. Classic crowding out.

Collective investment schemes (“unit trusts” or “mutual funds”)

Assets under management of the collective investment schemes industry were ZAR3.36tn at the end of the second quarter of 2023. In the year to June 2023, inflows were ZAR567.3bn while outflows were ZAR577.7bn, giving net outflows of ZAR10.4bn. For money market funds, which are most significant holders of government debt, inflows were ZAR325m and outflows were ZAR326m, giving net outflows of ZAR1.5m.

This highlights that the savings base is only slowly rising… Not at all at rates required for meeting the additional gross debt requirements.

Inflows into money market funds - large holders of government debt - are weak

Source: ASISA CIS statistics (Various)

The Sarb data shows that approximately 14% of collective investment schemes assets are in public-sector securities. This would include other large public sector debt issuers, including Eskom and Transnet.

Share of collective investment scheme assets in public sector securities has risen since 2008

Source: SARB Quarterly Bulletin (s-38)

The Government Employees Pension Fund

One of the largest pools of money is under the control of the Public Investment Commissioners including the Government Employees Pension Fund (GEPF), the Unemployment Insurance Fund and the Compensation Fund. Total assets rise to ZAR2.3tn of which about 90% are from the GEPF.

There has been a marked shift in asset holdings of the PIC since democracy. Equity ownership has risen from zero percent to approximately 60% of assets. This has been in part due to the exposure of the fund to fast growing shares, including Naspers.

Assets of the PIC have risen sharply and are increasingly in equity

Source: Sarb QB (S-39)

The PIC could be a source of ZAR debt take-up. It has long-dated liabilities (the rules governing it are within the control of the government). The pension fund, however, is independent and faces fiduciary responsibilities to spread its assets across a variety of different instruments. It is, however, not subject to the Pension Funds Act nor to Regulation 28, and its investment policy is at the discretion of the GEPF Board (not the PIC board). (The investment policy is available here). Its asset benchmarks are set out in the Figure below.

GEPF strategic asset allocation is to limit exposure to government bonds

Source: GEPF

Currently, the strategic allocation percentage to government bonds is 31%, which has been the level for quite some time. An increase to the maximum under the investment policy (40%) would imply capacity of approximately ZAR225 bn or a third of financing needs, suggesting that the GEPF is still a source of borrowing capacity, even within its existing guidelines.

That said, one of the unintended consequences of the wage freeze has been that inflows to the GEPF are slowing. Members pay 7.5% of pensionable earnings to the scheme and the employer makes a similar contribution. With overall wage growth being reduced, the outcome is that inflows are rising less quicky at approximately ZAR87bn per year, down from ZAR89bn in 2021. This makes the fund more reliant on returns.

GEPF contributions have tapered off as government wage growth has slowed

Source: SARB QB S-45.

Private pension funds

Private pension funds are a final potential source of additional onshore capacity. However, the data should be treated with care. Much of the pension fund money is directed into collective investment schemes and/or life insurance policies. Thus it is not to say that there is additional capacity – rather the different “pots” are largely the same pot.

The share of pension fund assets in public sector securities has remained around 20%

Source: SARB QB S-45. We use a simple “look-through” and include public sector securities held in insurance policies held by pension funds. This is not an accurate estimate as it may vary but is indicatively correct.

How much additional appetite is there? Private pensions have around ZAR3.5tn of assets and so any additional appetite would be a very, very maximum of say 50% of assets. This would be ZAR1.75tn or just less than that currently held by pension funds.

What is the demand for Eurobonds?

South Africa has traditionally issued a relatively small volume of non-ZAR denominated Eurobonds. The internal benchmark is around 10%. To some extent, IFI borrowing has led to that rising, but it is still low by international comparison. Indeed, one of the strengths of the South African fiscal position has been the ability to reduce the share of foreign debt from peaks of around 20% to 10% by 2022.

In Figure 14, we dig into the quantum of foreign debt issued by South Africa. The time-series differentiates between “marketable” and “non-marketable” debt. The former is typically the usual foreign currency denominated Eurobonds, while the latter is a catch-all for various direct placements, typically international financial institutions (IFI) or special development finance institutional bonds, such as concessional finance relating to climate change.

There are two sharp increases in non-marketable debt – in 2002 and then again in 2020. The 2002 increase was due to the controversial arms deal and related financing – for more details see Table 5.8 of the 2003 Budget Review here. The 2020 increase is naturally due to the additional financing the country took on during the COVID period.

How much demand is there for South African foreign currency debt? Foreign currency debt ownership statistics are not available for the full stock (Bloomberg provides ownership details for approximately 30% of the stock), and so it is difficult to conclude how debt is held. Anecdotal evidence suggests that there has been a shift out of long-only pension funds into more speculative funds, and even into hedge funds based on potential long-term risks.

FX debt has risen to USD20bn, with a large share of “non-marketable (IFI) debt

Source: Sarb QB S-57

The appetite for debt can be derived from standard market statistics, including the cross-currency basis point spread, credit default swap (CDS) spreads, and the breakdown of the different risk premia. While CDS spreads theoretically show the cost of insuring against a default, in practice they provide a good barometer for relative attractiveness of debt. And by this measure, South Africa’s CDS spreads are second only to Turkey in a basket of peers. Moreover, most peers have seen CDSs fall – in contrast South Africa’s are unchanged.

South African CDS spreads are high relative to peers and cross currency spreads have risen

Source: Bloomberg

Anecdotal evidence also doesn’t suggest much appetite from foreign investors at the moment for Eurobonds. We recently did a tour of some institutional investors in London and found the general vibe was “meh” – or indifference to South Africa and South Africa’ narrative. There is no default on the horizon, so hedge fund managers don’t see a need to short; there is no major upside surprise coming on revenue, so long managers don’t see the need to hold long debt. There is, of course, always appetite for high-yield bonds in hard currency. But the risks (and costs) of a substantial expansion of SOAF issuance need to be weighed against the benefits.

Expanding issuance of IFI debt (particularly concessional debt) is tempting but risky. Other African countries have become attached to low-rate concessional IFI funding, but this needs to be rolled over. Often at much higher rates or with the IFIs again. This creates a doom-spiral where the country becomes locked into an IFI lending programme, which creates moral hazard on both sides.

Conclusion

In short, with the fiscal position deteriorating, additional bond issuance is now a near certainty. Our estimate is that National Treasury will have to issue ZAR1.86tn over the next three years.

It is difficult to see where this will be issued. While South Africa has deep and liquid capital markets, such a sheer volume of debt may be difficult to issue even before we consider crowding out effects and the like.

South Africa has a structurally weak savings base. What this means in practice is that the big balance sheets of pension funds and banks are just not growing fast enough to absorb new issuance. The consequence is crowding out – money is diverted from lending to productive activities towards the government (and we know from the government statistics into consumption). This is at the heart of the fiscal problem – borrowing is simply not going into growth-enhancing investment which means that we are stuck.

This is the essence of our fiscal trap and why consolidation is so crucial beyond the narrow arguments of cutting this or that but to allow private sector growth and investment not to be impeded. Note we do not see tapping PIC or GFECRA as a viable option in the policy mindsets of NT (or SARB, or PIC).

Meaningful shifts in the coming horizon of three years are unlikely or at best slow and as such an outlet for further issuance will have to be found – and wherever it comes will mean at higher interest rates – and that seems most likely in hard currency with SOAF.

Didn’t make the cut for an invite to Jackson Hole last weekend? Don’t worry neither did I, but I have read the papers this and watched what I could on YouTube, so it was like being there. Sort of.

“Jackson Hole” is technically the annual symposium of the Kansas City branch of the Federal Reserve held at Jackson Lake Lodge near Jackson Hole in Wyoming. It became popular once Paul Volcker started attending and speaking. It seems he actually wanted to enjoy the great fly fishing in the area, which is held in late August. It is also, interestingly, one of the least equal places in the whole United States, in part because of Wyoming’s very generous tax regime.

For the market, the highlight is the address by Jerome Powell, Chair of the US Fed, which signals the direction of monetary policy. It added a cool new quote - he said we are “Navigating by the stars under cloudy skies”, which is about the only interesting thing in the whole speech. This is a good thing - there were no surprises.

For macroeconomists, of more interest is the conference itself. Previous conferences have included pathbreaking papers on central banking at low interest rates, balance sheet policy as a tool for central banks and the macroeconomic dilemmas facing emerging markets.

So the academic side can be a big deal - even if the papers don’t become famous, then often it is a very high profile event.

This year, the purported theme of Jackson Hole was “structural shifts”. But going through all the papers, the actual theme was debt and growth, both of which are of local relevance.  Three papers touched on a common theme that we are at an inflection point in the global structural macrofinancial cycle – where are we in the cycle of growth, interest rates and debt? Darrel Dufflie of Stanford sounded the alarm about the US Treasury market, noting that the amount of US Treasury bonds is rising rapidly relative to market capacity. Barry Eichengreen highlighted that the world is carrying a lot of debt and this is likely to remain for quite some time, with long run consequences. Charles Jones expressed concern about the slowing of US productivity growth which he linked to slowing innovation. 

Below, the highlights package: the Powell address and a quick summary of the three papers.

Jerome Powell’s address and the impact on monetary policy

Powell’s address has been extensively covered in the media, and by other bloggers, so I won’t regurgitate it here. The key points that came out were his resolute statement that “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” The market read this to mean that the Fed believes inflationary pressures remain and that the Fed would only reduce rates slowly and in the classic “data dependent way”. Following the speech, benchmark 10-year yields were 4.27%, up only 4 basis points. The 2-year was at 5.09%, up only 7 basis points. So the market didn’t really react.

US yield curve, 1 August 2023 versus 28 August 2023

Source: US Treasury

No surprises in his speech. It also did not give new insight into a key question that markets are grappling with – how far are we from the top of the US Fed rate cycle?

The US yield curve does seem to suggest that rates are high and likely to fall, while demand indicators remain very strong. The yield curve remains inverted, largely because the market is pricing in that we are at the top of the cycle and, not, we think because there is a US recession coming. At this stage (touch wood) it is likely to be a soft landing.

The US labour market remains tight. Unemployment rate eased to 3.5% in July 2023 (3.6% in June). The “U-6 unemployment rate”, which also includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment, fell to 6.7% in July (from 6.9%). The labour force participation rate is at its highest since March 2020 (62.6%).

This is not new – there is no reason to expect any interest rate reduction quite yet. Powell’s speech does not change our view on US rates, which is that they will slowly start declining in late 2024 as the lagged impact of an unprecedented tightening of monetary policy feeds through to growth and inflation.

Now turning to the academic part of the conference. It was dominated by concerns about high debt levels and slow global growth. This manifests in a US Treasury market that is not terribly functional.

Paper 1: Structural shifts in the US bond market

In his paper, Darrel Duffie from Stanford University sounds the alarm about the functioning of the US Treasury bill market, saying that current intermediation of the US Treasury market “impairs its resilience.” Risks include losses of market efficiency, higher costs for financing US deficits, potential losses of financial stability, and reduced safe-haven services to investors.

It is the last part that is of most concern – US Treasury debt is an important safe having asset during periods of extreme volatility. The key concern is primary dealer market capacity, which Dufflie shows is under strain. The ratio of US Treasury securities outstanding to primary dealer assets has risen significantly.

The ratio of US Treasury securities outstanding to primary dealer assets has risen significantly

Source: Dufflie (2023)

The paper raises a very important dilemma. Dufflie highlights that the consequence of tighter regulatory requirements on banks has “reduced the short-run flexibility of liquidity provision”. With US debt levels rising and US primary dealers having less flexibility, the consequences are a sudden market event could have severe implications – the US Treasury markets would simply not be able to fulfil its traditional role to the global financial system of providing liquidity.

The dilemma is that the very liquidity regulations that should be increasing financial market resilience may be making the Treasury bond market more fragile, with the unintended consequence of reducing resilience.

The COVID shock is a case in point. There was quite a significant dislocation of Treasury markets around the world. Liquidity dried up significantly – including in South Africa. Central banks intervened. (A Sarb working paper on the South African experience by Roy Havemann, Henk Janse van Vuuren, Daan Steenkamp and Rossouw van Jaarsveld is here).

Perhaps if liquidity regulations had been less stringent, the Treasury bill market would have functioned better? It is difficult to establish this but his conclusion that individual bank regulations may be harmful to overall financial stability should lead to global financial committees taking note.

His core recommendations are to broaden central clearing (i.e., create a mechanism where trades are cleared), all-to-all trading (all-to-all trading would allow any market participant to trade directly with any other market participant), phasing out the US Supplementary leverage rule and some of the GSIB scoring requirements.  This could be particularly helpful in times of stress, when the capacity of traditional intermediaries may be tested. A final recommendation is to introduce a clearly articulated market function purchase function programme. (Our paper showed that it was actually the announcement by the Sarb that they would intervene that cause the market to calm down).

Paper 2: Structural shift to high public debt

A second, related theme is on the structural consequences of persistently high debt levels. In particular, debt levels in sub-Saharan Africa, Latin America and Central Asia/Middle East have risen faster than the overall emerging market level and these debt levels are likely to be persistent.

Debt as % of GDP is at elevated levels in advanced economies, emerging markets and South Africa

Source: IMF World Economic Outlook, 2023

The public debt session focused on high public debt. The main paper in this theme was from Barry Eichengreen, a highly cited economist and economic historian, and Serkan Arslanalp. It is available here. It explores global high public debt levels.

They put forward the following main thoughts on high public debts:

·        High public debts are a new reality.

·        The political viability of achieving a persistent high primary budget surpluses is quite low. This means that public debt are likely to remain high for the foreseeable future.

·        In most countries (South Africa being the notable exception), interest rate - growth dynamics are favourable. But it is difficult (in Eichengreen’s view) to see how real interest rates could come down. The paper echoes Jones in the view that faster global growth is unlikely – and Eichengreen’s view is that AI will take a while to translate in faster aggregate growth.

·        Other ways of structurally reducing debt are off the table. Inflation is not a sustainable way of reducing high public debt – only unanticipated inflation could achieve this and that is very difficult, while financial repression as a means to reduce debt is not sustainable.

Paper 3: Have there been structural shifts in global growth?

Charles Jones, a prolific author on economic growth, spoke to structural shifts in economic growth. (His slides are here and the paper that he based his talk on is here). He highlighted the slowdown in productivity growth in the US.

His approach to looking at growth is in the semi-endogenous growth tradition, one of Paul Romer contributions that won him the 2018 economics equivalent of the Nobel Prize. This tradition is (slightly) different from traditional growth theory. It focuses on ideas rather than technology.  A new idea can be used by a number of people at the same time (it is “non-rivalrous”). He gives examples of ideas as a new farming technique, faster computers, or an advance in solar panel efficiency. An idea, like a new farming technique, can spread quickly. Ideas do not need to be country specific. And the best ideas are difficult to patent, so they can spread quickly. This departs from a lot of growth theory that tries to show that country specific factors (e.g., country specific research and development, education levels etc.) drive productivity growth. 

In his Jackson Hole talk, Jones grapples with a deep question: have we run out of new ideas? And if we have, does this mean economic growth will start slowing forever? For the United States to maintain economic growth of 2%, ever-rising resources have to be expended in R&D. This is the “Red Queen theory”, based on the character in Alice in Wonderland, which is that we have to run faster and faster to stay in the same place. He has a slide showing how total factor productivity in the US has stagnated from 2010.

United States total factor productivity has slowed

Private business sector

1990-2003: 1.1%

2003-2022: 0.6%

Manufacturing 1990-2003: 1.6% 2003-2021: 0.4%

Source: Jones (2023), Krutham, US Bureau of Labor Statistics

On the role of artificial intelligence (AI) in long-term economic growth, building on some of his earlier work, his view is that AI is very good at making existing processes run better. But AI does not generate new ideas, and so is not growth enhancing. The consequence is that US growth may be entering a period of structurally low growth.

Conclusion

All in all - what did we learn? Not a lot but then Jackson Hole is a good annual stocktake of what is happening. This year was no different - it told us that everyone is worried about debt, growth and the capacity of banks to absorb increased issuance. Certainly things we worry about here in South Africa too.

A whirlwind visit to London (mainly to work on the new Krutham brand and strategy – more details coming) gave me an opportunity to catch up with a number of pension funds, hedge funds and other people interested in South Africa. It was my first major London trip post Covid.

I could not help comparing it to a famous trip in 2015 with the Standing Committee on Finance where we also saw a similar range of people. I travelled with Floyd Shivambu, and investors were keen to meet him. That uitstappie was somewhat disrupted by Nhlanhla Nene being fired. I scurried back to South Africa. On my flight back, Desmond van Rooyen was replaced by Pravin Gordhan and the rest is history. Yes, that weekend.

The growing levels of alarm amongst investors were patently obvious on that trip. Many seemed to know that the firing was coming.

This trip was completely the opposite. The general view on South Africa seems to be “meh”. Indifference. There is no impending fiscal collapse, or even anything like a Ghana or Kenya write down. Also, there is no upside. Investors like Operation Vulindlela, but boy is it slow.

And, as one hedge fund manager put it, South Africa falls into nowhere land. Indifference. And the opposite of love is indifference.

That said, the following things came up a lot.

First, r – g. In fiscal economics, when the borrowing cost on debt, r, is above the economic growth rate, g, then you are in trouble. This is because debt will grow faster than revenues. You have to make sure you run a primary surplus - i.e., you have to revenue has to be more than non-interest spending . (I simplify a lot, but you get the idea). In South Africa, r > g. This is not good. It means we need to either magically raise revenue or keep a tight tight lid on spending, otherwise debt will explode.

It was striking how many money managers asked about the r – g framework as a quick and dirty test of where a country is fiscally. It is, of course, a great and intuitively useful intellectual framework. In 2022, macro guru Hylton Hollander and I extended the Stellenbosch DSGE model (with a full fiscal block and a monetary policy block, including a game theoretic approach to monetary-fiscal coordination) to look at the various economic scenarios around r – g (Paper is here). We ran simulations of various monetary and fiscal outcomes. I recently updated the analysis for clients using newer fiscal data (available here) although without all the clever modelling.

Whichever way you do the sums, the answer is the same. Treasury has to run a primary surplus for a long long time. This is possible but it means (as Michael Sachs so eloquently highlights here) that service delivery suffers. And this is precisely what Treasury will do, budget after budget, MTBPS after MTBPS. Of course, it only we could get structural reforms to move slightly slower than Godot, that problem would lift and rising revenues could create a virtuous cycle of growth enhancing spending. Oh well, we will get there. One day.

Figure 1 r and g forecast

Source: Intellidex

Second, related, was whether or not there was market appetite to absorb a step-up in issuance. Generally, we share the market view that there will have to be a step up in issuance at some point. There is concern that the holdings of South African paper have shifted over the past number of years toward South Africans, with foreign appetite stagnant in ZAR terms and falling in USD terms. While domestic players can absorb additional issuance at higher rates, this will come at the cost of credit extension (for banks), equities (for institutional investors) and other debt. Classic crowding out.

Figure 2 Share of holdings of government debt

Source: National Treasury

Third, Eskom. I hold a somewhat contrarian view that the Stages Of Loadshedding, much like the Stages of Grief, are an increasingly meaningless concept. They were originally designed to give a sense of how much energy the country was short. So stage 1 means 1GW of demand that is unmet, Stage 2 is 2GW etc. Of course, demand is increasingly and increasingly met by private supply.

This has important implications for growth – loadshedding is less and less of a problem for many companies as they are rapidly going off grid. It seemed to me some offshore investors don’t quite realise how quickly this is happening. The energy constraint is slowly lifting

Figure 3 Loadshedding forecast

Fourth, Russia. I was struck by the fact that our clients understand the difficult situation South Africa (and many other BRICS) finds itself in, but (correctly) have little sympathy for how badly South Africa has communicated. The old saying: when the elephants fight it is the grass that suffers springs to mind – many offshore investors understand that that the geopolitical tension between the US and China leaves many emerging markets in a bind. Of course, South Africa has managed to annoy both the US and potentially also Russia with recent insistence on some grain deal, whereas India has managed to stay friends with both sides. Some interesting perspectives on this from Foreign Affairs magazine on the US hypocrisy issue here, which comes up a lot in South Africa; and some other perspectives here.

And finally… the 2024 elections. Our views on the elections were probably of most interest. Overall, our view (which was shared by most) is that the elections are probably unfortunately a little bit of a non-event. Our baseline is still that the ANC will get around 46 or 47% and cobble together a working coalition. The dynamics inside the party will likely not change, and the only hope is that Operation Vulindlela continues, even at a very slow pace.

Our election scenarios are below – we don’t see a major risk event. I spent many meetings explaining the French style runoff system for the President. Although it is a proportional representation system, members of the house pick the President in a run-off. This means that a confidence and supply minority government is possible (and is quite likely), but it will be messy and hard work.

Figure 4 Election scenarios

Overall, an interesting trip but with no surprises. The highlight was that Curator, one of the AB Badenhorst wines, is sold in a little can at the Tate Modern for just on GBP 7, or ZAR 140. This highlights how creative and innovative Adi has become and how many interesting high value add export opportunities exist … if the ports could function better.

Figure 5 Export opportunities?

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The theme of 2023 continues - global and domestic interest rates are rising at a rapid pace – US rates have risen the fastest in recorded history. The speed at which global (and domestic) macro rebalancing is taking place is unprecedented. The Sarb is raising fast but not as fast as the rest of the world. Our macro forecast is that there will be one more interest rate hike of 25bps to take us to 8.5% and then unchanged until 2025. This does suggest that the positive impact of higher rate on banks’ profitability will come to an end, and rising impairments and weak lending conditions through 2024 will cause pressure on bank profitability.  

Figure 1 Fed funds and repo rate 

Rising interest rates should be positive overall for bank profitability but this is a new world. As we covered in our previous note on the Silicon Valley Bank collapse, a sharp rise in interest rates also leads to asset repricing, which can have significant consequences as interest-rate risk materializes.  

As we note in Figure 2, bank profits may have peaked, suggesting that there are other channels through which the interest rate cycle affects bank: funding costs, impairments, growth and inflation effect, capital flow effects and balance sheet effects. 

Trading updates from the big four suggest that it is indeed a race – Standard Bank note that banking revenue growth was 20% up, but that impairments were up 50%. Nedbank carefully couch their wording but suggest that interest rate effects are outweighing impairment effects. FirstRand indicated that NII is up but notes higher funding costs. (The trading updates are provided in Table 1 at the end of this section). 

As we note in Figure 3, bank profits may have peaked and indeed with the repo cycle also peaking, the negative second-round effects may begin to weigh on overall profitability. These include higher funding costs, rising impairments, weaker growth and lower inflation, capital flow effects and balance sheet effects. We briefly unpack each of these below. 

Figure 2: Bank profitability has risen strongly, buy may be reaching a peak  

What is the impact of the rates cycle on banks? 

Channel 1: Net interest income 

Unsurprisingly, net interest income follows the repo cycle reasonably closely. Rising interest rates have led to an increase in overall net interest earned.  

Figure 3: Net interest income has risen with the upward cycle of the repo rate

Figure 4 Interest income by type of loan/advance has also trended toward homeloans

The interest income by the type of loan also reflects overall credit conditions. Interest earned on homeloans has trended marginally upwards, rising from 26.8% of interest income in mid-2020 to 29.3% of all interest income in 2023.  

Channel 2: Funding costs (interest expense) 

The second channel is through bank funding costs. Depending on how a bank funds itself (lazy deposits which can reset slower or short-dated NCDs, which track overnight rates), the impact of a rising rate cycle can differ quite significant bank-by-bank. Interest expenses have risen sharply on aggregate, reflecting relatively short-dated, interest-sensitive funding by banks.  

Figure 5: Cost of funds (Interest expense) vs repo rate 

Figure 6: Deposit growth (average y-o-y) was positive in 2022… 

Figure 7 … led by longer term deposits (‘000) 

Rising interest rates have also, according to the trading updates, encouraged increased bank deposits. In particular, long-dated deposits (six months plus) have risen strongly as depositors see the benefits of higher rates and wish to lock them in (see Figure 7). 

Channel 3: Impairments and credit losses 

The third channel that rising rates can impact a bank is through impairments. The relationship is, however, complex. Interest rate upswings are generally associated with business cycle upswings – generally, the central bank is trying to dampen the credit cycle. Indeed, strong credit growth, falling impairments and rising interest rates generally are contemporaneous because they all reflect the same underlying economic situation – which is a strong, overheating economy. In our view, this interest rate cycle is significantly different. The current rising inflation has very little to do with a strong economy and much more to do with second-round effects from loadshedding, together with rising global rates. Indeed, the Sarb is tightening monetary policy during a very weak economy. 

Both the annual results season and the earnings updates from the banks highlighted significant additional provisions for impairments. The May banking monitor dug a little deeper into the impairments trend. Both impairments and credit losses are rising and over time with the weaker economy and higher rates are likely to continue to be significant.  

Figure 8 Impairments and credit losses are both trending upwards (‘000) 

The impairments data is the one to watch. The weakening economy and feed-through to credit losses will inevitably put bank profitability under pressure. 

Channel 4: Balance sheet growth 

Figure 9 Private sector credit extension (y-o-y change) is easing 

Rising rates have the effect of dampening credit growth – although our discussions with bankers suggest that the quality of credit growth is substantially better now (it is nearly the top of the interest cycle and those that can afford to borrow now are only the strong credits). Annual growth in PSCE slowed further to a 3-month low of 6.8% in May from 7.1% in April. This was a tad lower than the consensus estimate of 6.9% while we expected the print to remain unchanged.  

Investment spending was quite a bit stronger than expected moving from -11.7% y-o-y to +3.0% y-o-y, while mortgage growth was weaker than expected (now the weakest since September last year at 6.1% y-o-y) but offset marginally by better instalment credit. The negative shock came from a collapse in short-term borrowing in “other”. 

Overall real household credit growth was 0.3% y-o-y from 0.2% previously while real corporate credit growth was 0.5% from 0.3% previously. 

Mortgages. Elevated costs of living and increased borrowing as well as debt-servicing costs continue to corrode affordability, especially in the lower-income group. However, price growth remains well supported in the lower end while property values have declined significantly in properties valued above R5.5m/ Supply of properties has trended upwards thus far in 2023 and is higher on a year-on-year basis. In contrast, demand is declining reflecting the challenges faced by consumers  Unsurprisingly, the FNB House Price index growth continued to decline in May at an average of 1.9% (y-o-y) from 2.1% in April. 

Vehicle asset finance. The squeeze on middle-class disposable incomes reflected in decline in Q1-23 in both VAF (-8%) and home loans (-4%) – from flat growth in Q4-22. Rates of new defaults (RNDs) on such loans continued to rise at 22% for VAF and 32% for home loans. 

Unsecured credit. Current balance on all loans rose 1.9% q-o-q at R2.32 trillion, with most loan products remaining relatively flat. Home loans and credit card products had the largest increases in current balance, with balances increasing by R27.5bn (2.4% q-o-q) and R6.4bn (2.7% q-o-q). 

Defaults and overdue balances are up q-o-q for the first time since Covid, with total overdue balances increasing by 3% q-o-q. 

Figure 10 There is a slow shift towards corporate lending 

Table 1 Trading updates - (copied verbatim) 

Overall

Overall, our conclusions is that bank profitability has been buoyed by rising interest rates. As rates plateau, and impairments rise and funding costs remain elevated, the outlook for profitability looks somewhat murky. Banks hav indicated willingness to lend to strong credit (particularly on the back of energy market reforms) and this may support balance sheet expansion in 2024 and 2025, but at this stage, the outlook is for a difficult next year.

AGM Watch

Bank AGMs this year were overall less fractious than the last two years, particularly on remuneration (held from late May to mid June for Nedbank, Absa and Standard Bank). There was a marked improvement in votes in support of remuneration policies and implementation:

Notably, Capitec managed to turn around a very negative view last year to scrape above the 75% threshold. Nedbank fell just short of the threshold, though overall there was better shareholder support than last year. Standard Bank also marked a significant improvement. 

The 75% threshold is needed to avoid having to engage with shareholders to discuss remuneration issues. This engagement has become fairly nominal after previous engagements saw few shareholders taking up the opportunity. The temptation is to conclude that remuneration votes are not fully well considered. As always, however, there are a mixed bag of investors and buy side analysts, some of whom are very well considered. 

Temperatures dramatically escalated during the Covid period where performance on key metrics meant many option schemes were left deep under water. In several cases, directors used discretionary space allowed by policies to introduce new schemes or summarily change vesting conditions so as to ensure executives were well remunerated through the Covid period. The obvious argument was that retention was key during the period and incentives needed to drive hard work in managing the crisis. 

Investors, of course, saw it differently and decried the misalignment of shareholder and executive outcomes during the crisis. That triggered heightened shareholder scrutiny of remuneration policies, a genie that is unlikely to be put back in the bag. While proxy advisors are often blamed for the turn of institutions against certain remuneration practices, we’ve found that fund managers and sell side analysts are paying more direct attention to practices than in the past. This genie will not go back into the bottle. 

This should place renewed pressure on remuneration committees to engage shareholders and ensure appropriate consideration of their concerns. We’ve experienced several bank directors dismissing those concerns as ill informed – but at the same time, fund managers have bent our ears about the “arrogance” of those same directors. This misalignment needs some reconciliation. While the lack of engagement in consultations post negative votes is seen as shareholder apathy by Remcos, shareholders tell us they stopped engaging because it made no difference to the practices they objected to, with Remcos merely doubling down. 

The risk here is that shareholders mount more pressure for binding rather than advisory votes, or at least more binding consequences such as a “two strike rule” in Australia that requires a “spill resolution” to be proposed to vote out directors. This has clearly inspired provisions in the 2021 Companies Amendment Bill that would require the Remco to stand for reelection in the event of two strikes. 

So while boards may groan at the consultation and reporting consequences of a negative vote, we think it is important to take shareholder concerns seriously and interrogate the practices that are at the heart of the problem (which is, broadly, any whiff of discretion). Without a genuine effort to reconcile their concerns, more strenuous regulatory consequences may well come, lobbied by frustrated shareholders. 

Perhaps the real question for Remcos to ponder is how remuneration should be structured for the next crisis. Is there a non-discretionary mechanism that could be created? Should there be? Or should the idea that executives can escape the fate of shareholders in the event of disaster be consigned to history? 

Basel developments: Recovery and resolution 

We have reflected in recent banking monitors on the impact of the collapses of Silicon Valley Bank and Credit Suisse on the path of regulatory reform. Will it lead to a new plethora of regulations, particularly on resolution?  

Reading the latest statement from the Financial Stability Board, the apex committee that brings together the Basel Committee, the International Organisation of Securities Organisations and the International Assoociation of Insurance Supervisors, we think not.  

It is a bit of sniffy statement, noting that: “Prior to these events, the FSB had already planned to conduct a peer review on the overall implementation of the too-big-to-fail reforms in Switzerland, and it expects to publish its findings by early 2024.” One might expect that the FSB will take a route that revenge is a dish best served cold… one can expect a rather harsh peer review as the international community is less than pleased at how Switzerland has implemented internationally agreed recovery and resolution standards.  

They flag a review of how supervisors implement the international standards. South Africa, of course, passed its own FSB review with flying colours. The only niggle is the difference between point of resolution and point of non-viability… but perhaps the renewed focus on the issue with lead to guidance from Sarb on how this will be implemented in practice.

Climate risks 

On other areas, the FSB highlighted the onward march of the climate risk agenda. They (and we) are particularly pleased that the International  Sustainability Standards Board (ISSB) has finalised its climate-related and general sustainability-related disclosure standards, which will serve as a global framework for sustainability disclosures. The FSB (and we) look forward to the International Organization of Securities Commissions consideration of endorsement of the standards. This will hopefully bring together what are significantly disparate areas. Our own work on this area also marches forward relentlessly (some of it here).    

RCAPS 

As part of its Regulatory Consistency Assessment Programme (RCAP), the Basel Committee regularly undertakes assessments of South Africa’s adherence to Basel standards. The Committee found the Net Stable Funding Ratio (NSFR) regime to be largely compliant and the large exposures framework to be fully compliant. On the NSFR implementation regime, three out of four components were compliant for the criteria of scope, minimum requirements and application issues, required stable funding, and disclosure requirements, while the available stable funding component has been assessed as largely compliant. Full compliance is expected to be reached by January 01, 2028, which is as expected as South Africa slowly moves toward full implementation of the NSFR.

Share prices & PE ratios

Market share changes

If you’re interested in our Banking Insights subscription, including Banking Monthly, BankAnalyser software, bank results flash notes and much more, please email research-distr@intellidex.co.za to discuss options 

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This research report was issued by Intellidex (Pty) Ltd.

Intellidex aims to deliver impartial and objective assessments of securities, companies, or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments.

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We approach this question in two ways:

1. The classic Blanchard r versus g approach, where we show that that r > g for many years to come, meaning that the Treasury will need to run a (rather worryingly large) primary surplus indefinitely to even have a chance of stabilising debt.

2. Bottom-up. We forecast forward a 10-year baseline estimate for the fiscus from now until 2033 using plausible but bullish assumptions on growth and spending restraint.

While we share the market’s view that the National Treasury is overoptimistic on debt stabilisation, we do not think that debt will blow up (helped by its structure and low share of FX debt). Our baseline is for debt stabilisation to occur in FY2027, as the energy constraint lifts and years and years of budget restraint finally stabilises expenditure. The problem of course, is if slumps in growth occur, debt will shift higher and higher still.  

The downside risk is that the 2024 Election delivers a fiscal expansionist government (or even just one that only runs a primary balance or small deficit), and debt levels deteriorate faster. The major upside risk is that state-owned enterprises are restructured and no longer bleed the fiscus dry in the long run.  

This is the first of a series of papers on pressing fiscal issues.

Where are we now? 

South Africa has a debt problem. Over the very long sweep of its history, the country has seen up and down cycles of debt. But the post-2008 period has been the most significant period of debt accumulation since the 1991-1998 period, and government debt (as a share of GDP) is now at post World War II levels. 

The accumulation of debt is due to rapid expenditure growth. This has been primarily on wages which grew quickly post 2008. 

Tax increases have not helped. Attempt to raise taxes have had negative effects, with estimates of tax multipliers suggesting that these have not supported increased revenue but may have reduced it.  

There is no evidence that the debt expansion has provided any fiscal stimulus. Fiscal multipliers suggest that expansionary fiscal policy has been an overall drag on growth. The negative effects (higher interest rates on borrowing and higher taxes) have outweighed any positive economic stimulus.  

With this in mind, we ask the question: is the fiscal position sustainable? We approach this in two ways: the theoretical r and g approach and a bottom-up forecast of the fiscal position over the next ten years. We compare our estimates to those of the Treasury and the IMF. 

Approach 1: r and g 

Debt service costs and growth give us a quick way of establishing sustainability. The simplest and most intuitive approach to considering fiscal sustainability is by comparing r, the average interest rate paid on net government debt,¹ with g, the nominal growth rate.² The mathematics tell us that when r > g, then the government needs to run a primary fiscal surplus to stabilise debt; while if r < g, then government can run a small primary deficit but still stabilise net debt. ³ 

Intuitively, this is because revenues grow at g and (with some simplifying assumptions) debt grows at r. So, if r > g, then debt growth will outpace revenue growth. Houston, we have a problem. Taking the data back to 1980, we see that generally periods of r > g are associated with increases in debt to GDP. 

Our estimate of nominal r is around 6.8%, based on an estimate of the effective nominal interest rate on government gross debt. This may seem rather low – surely with bond yields closer to 11 per cent, average borrowing costs should be significantly higher? The answer is three-fold. First, issuance is along the curve; second, the Treasury has a long-dated debt portfolio, much of it issued when yields were lower; and third, new offshore issuance is increasingly in cheap international financial institution (IFI) money, e.g., from the World Bank or IMF.  Of course, the risk is that the cost of debt will start to spiral as redemptions start to kick in. The second risk, which is exactly what has happened to Kenya and Ghana, is cheap IFI money supports an unsustainable fiscal path and only delays the reckoning. (See box).  

We can estimate this by looking at the Treasury’s redemption profile over the next few years, and the cost of issuance coming to derive a shadow interest rate on debt.  

Second, why the large difference depending on gross versus net debt? The government holds reasonably large balances for an emerging market – approximately 4.8% of GDP at the end of 2022/23. 

We see r rising slowly toward 8% as debt is refinanced at higher rates. What is the trajectory going forward? r is low because of the historical issuance strategy. As debt continues to accumulate, however, and needs to be re-issued at ever higher rates, the risk is that r rises quickly. This is the debt-spiral problem that most concerns the market, unsurprisingly. 

Over the next three years, for example, approximately 10% of all debt will be refinanced. While over the medium term this is manageable, if interest rates remain high for several years, then r could rise over time and create significant problems.  

The entire debt stock will need to be refinanced within 11 years. If the fiscal consolidation takes too long, and interest rates remain elevated, then this will be a new squeeze on the fiscal position.  

Our baseline estimate is that due to refinancing, r will rise over time from the current upper 6s to closer to 7.5%. We base this on our estimate of the refinancing projections. 

Our view is that long-run growth will remain relatively flat while the structural reform agenda remains stuck. Inflation is firmly under control, suggesting that long-run g of around 6.5%. (The bounce up in g in 2024/25 is due to our view of higher inflation).   

Our baseline is thus that the Treasury will need to run a primary fiscal surplus for some time to counteract the rising rate on government debt. We can derive the required primary surplus. We estimate that under reasonably moderate assumptions (set out below), the Treasury will be able to achieve a flat primary balance that keeps debt growth reasonably flat. We do not, however, at this stage see that the Treasury will be able to reduce debt. The main budget deficit slowly improves toward the 4% of GDP level. This highlights how weak the long-term fiscal position remains – because interest payments are projected to slowly rise to 5% of GDP level, the Treasury will have to “keep running to keep still” for quite some time – i.e., run a primary surplus just to maintain sustainability. (The r – g approach above shows the same).  

This is a narrow achievable window with a number of risks, which we set out in detail in the next section. Moreover, historically, before 2008, the Treasury was able to manage an average primary deficit of 1.8%.   

This leads us to our forecast for the debt trajectory based on these assumptions. We also do a full bottom-up process to derive the forecast in the next section. 

Our issuance framework highlights some of the issues with debt levels here and debt sustainability.  

• We can see the significant Eskom debt relief additions to the gross funding requirement – i.e. even though the headline or above the line budget numbers are “ok”, they rise by another 20% on the cash needed for debt relief.  

• Switch auctions are not being used to dampen short run redemptions but will be required medium run as the burden of redemptions rise. 

• Significant cash drawdown is required this year in order to prevent SAGB issuance moving higher. We pencil in an additional ZAR12.3bn cash usage this year, but really more than this is impossible given NT’s risk views on cash stocks required.  

• To contain SAGB issuance increases, we have to up t-bill issuance – push FRN issuance much harder (the run rate is more like ZAR78bn for the year currently), undertake a benchmark S’ukuk every year and add in an additional USD SOAF issuance in addition to the budget-pencilled in IFI financing.  

• All of this still requires a step up in SAGB issuance next year from ZAR4.5bn/week from ZAR3.9bn/week this year (/currently). However, if the FRN, S’ukuk and wider push is not possible or if NT are risk averse and don’t want to use extra cash, then a further increase in SAGB issuance this year to about ZAR4.1bn/week would be required.  

The practical implications here are that there are very limited options given the state of the fiscus, no additional backstops given where cash levels are and a wall of Eskom debt relief that cannot be hidden from the funding requirement and redemptions and so debt levels will have to rise faster.  

Approach 2: Bottom-up  

The second approach is a full ten-year forecast, Our baseline bottom-up forecast projects the fiscal position ten years into the future. This allows us to estimate how debt will evolve and whether the long-term fiscal position of the country will remain sustainable.  

We project forward the main spending and revenue items for the next decade, together with the impact of rising interest rates on the overall debt stock to derive and estimate of debt-to-GDP.

Spending 

It is our view that the National Treasury’s budget forecast for spending over the next three years (and by extension the next ten years) is overly optimistic. There are four main areas where we differ from their forecast: compensation, social grants, employment programmes and state-owned enterprises. Each of these is subject to political forces and the risks posed by the election, which we discuss in detail below. 

Compensation 

The wage agreement has come in higher than National Treasury’s projection. We add the full estimated cost of R37.4 billion⁴ in 2023/24 to the Treasury’s projection of R701 billion for wages. But we deduct it from elsewhere as the Treasury has indicated that it will try its best to absorb the cost. In addition, higher than expected inflation implies necessary higher than expected wage settlements in each of the years ahead. 

We assume that compensation growth is rises at CPI + 1% over the next ten years. A significant risk is the need to increase headcount to deal with service delivery risks. However, as noted below, our population growth estimates are very moderate, suggesting that there is no coming population boom that will require additional staff. This is, however, not true spatially. Population growth is fastest in Gauteng and the Western Cape.

The historic experience has been that these two provinces add headcount, but that the other provinces do not reduce headcount. Moreover, the fast-growing provinces see a deterioration in key metrics (e.g., policeman per 1000, doctors per 1000). The slow-growing provinces see an improvement in aggregate service delivery measures, but at a microspatial level (e.g., at a district). Rural hospitals and schools run empty while urban hospitals get fuller.

Another way of looking at this is real spending per capita for certain services. Michael Sachs and his team at Wits have highlighted the spatial dynamics of spending. A glaring example is education (see Error! Reference source not found.). This creates a long-term spending risk as provinces such as KZN who are under resourced may demand more resources. Already there is a debate about adding “rurality” into the spending formula.

State-owned enterprises

The inability to reform state-owned enterprises poses an ongoing and significant fiscal risk. Treasury always underestimates the ability of the Department of Public Enterprises to break the budget framework (sometimes twice a year). The large state-owned enterprises, particularly Eskom and Transnet, have Cabinet-approved reform strategies but implementation has been delayed (e.g., the Eskom unbundling was first announced in 1998, and then again in 2019).  

State-owned enterprise bailouts are crowding out both social and infrastructure spending, causing significant long-term economic damage (over and above the damage of unreformed enterprises). Over the last ten years, unbudgeted for state-owned enterprise bailouts have been approximately R331 billion, equivalent to the entire budget for the old age grant. If we assume no change in political party in the 2024 Election, it is likely that political deadlock will continue and “unexpected” “emergency” bailouts for usual suspects (Eskom, SAA, Denel, Post Office) will be another R100 billion over the next ten years.  

The explicit costing of the Eskom debt takeover provides some certainty and reduces risk. That said, the National Treasury framework does not include provision for non-Eskom SOE bailouts, and there is an almost infinite list. The SAA equity injection has been disastrous to say the least, Denel continues to have difficulties, Post Office has indicated it may be applying for business rescue, etc.  

Our debt trajectory excludes the consolidation of Eskom into gross debt. Many analysts (not least Moody’s) consolidate Eskom into the overall debt-to-GDP ratio. This is intuitively correct – as a guaranteed SOE that is in distress, the sovereign is implicitly and basically explicitly on the hook. But the IMF gross debt rules allow it to be disclosed separately. To make our figures comparable to National Treasury’s we, reluctantly, do the same.  

Grants 

Our baseline is for a basic income grant is that the existing social relief of distress grant will simply be converted and remain R350 per month, rising by inflation. (See our research note on the topic).  The converse is true for the social relief of distress grant. The take-up remains reasonably low, and the eligible population is growing at around 1% a year. We assume that SRD/BIG numbers rise by population growth (1% a year). 

The market has shown significant concern about the noise around the introduction of a more expensive basic income grant. Our view is that this is unlikely. That said, the indefinite extension of the social relief of distress grant (R350 a month for around 8 million people costing R30 billion a year is inevitable. In our alternative scenarios section below, we assume a basic income grant at the Food Poverty Line.  

One risk that is not often discussed is the ageing of the South African population. ⁵ This will lead to increased take up of the old age grant, which is currently the largest grant costing R99.1 billion a year.  Those over 60 are growing at 2.31 % a year (post-COVID), compared to overall population growth rate post COVID of 1.06 % a year. We assume pre-COVID growth rates of 3% for our forward estimates of take up of the old age grant.⁶ It is thus the largest and fastest growing grant component over the next ten years. 

The other large grant by numbers is the Child Support Grant. 14 million beneficiaries receive the child support grant of R480 per month. We expect that the Child Support Grant will grow at the same rate as the under 19 population. This growth rate has been trending upwards over time but is still below overall population growth. (How can the overall population grow faster than the birth rate? The answer is a significant life expectancy gains, particularly as HIV/AIDS has been brought almost entirely under control. In short – there are fewer people dying than are being born, so the population is growing but ageing.)  

Employment programmes

The Presidency has articulated strong support for employment programmes. This is a fiscal risk (albeit reasonably small). As there is a risk that it will be both employment programmes and a basic income grant.

Revenue

Revenue has consistently tracked GDP over the past twenty years, with the notable exception of. Absent any major shift in the mix of taxes (which we think is unlikely), The only significant risk is significant reductions to the VAT rate, either through a reduced rate or through additional exemptions, e.g., for chicken.

Overall debt to GDP projection

This leads to our overall debt projection, which is for a reasonably flat profile over the next decade, bearing in mind the significant risks.

Notably, we do not see debt beginning to decline as a share of GDP. The reasons for this flow from our analysis above – the Treasury has been reasonably successful at getting spending growth under control, but we don’t see that there will be much scope for them to reduce expenditure growth to less than 2% a year in real terms. The pressures are simply too many – the state-owned enterprises will continue to inhale cash without economic benefit, the rural provinces (all ANC controlled) will continue to demand a larger share of the budget, and the need for increased spending on core services (such as education and health) will remain. There will also need to be a slow structural shift in spending as the population ages: In grants, there will automatically be greater share of spending on the relatively more expensive old age pension, while a smaller share on child support grants; and the shift from education spending to health will be slow and complex as population ages at different rates in different provinces. Finally, this could obviously all be solved with a much more aggressive structural reform programme – energy and logistics reform will unlock higher economic growth rates, which will create a virtuous cycle of an improved fiscal position and more capacity to spend on health and education.

Footnotes

[1] The market focusses on the consolidated gross debt to GDP, which we think is the wrong one to look at. While consolidated gross debt to GDP headline number is widely quoted (not least by the Treasury), is not a particularly helpful ratio for a debt sustainability analysis. This is because cash balances are not netted out.  

[2] Blanchard, Olivier. (2019). Public debt and low interest rates. American Economic Review 109(4), pp. 1197-1229.

[3] Havemann, Roy, and Hylton Hollander. (2022)  Fiscal policy in times of fiscal stress: Or what to do when r> g. WIDER Working Paper No. 2022/52.

[4] https://www.treasury.gov.za/comm_media/press/2023/2023033101%20Media%20statement%20-%202023%20Public%20sector%20coordinated%20bargaining%20council%20outcome.pdf

[5] Daviaud et al (2019).

[6]https://www.statssa.gov.za/publications/P0302/MidYear2022.pdf

References

• Blanchard, Olivier. (2019). Public debt and low interest rates. American Economic Review 109(4), pp. 1197-1229.

• Daviaud, E., Kelly, G., Cornell, J., Geffen, L., & Solanki, G. (2019). Population ageing in South Africa: trends, impact, and challenges for the health sector. South African Health Review, 2019(1), 175-182.

• Havemann, R., & Kerby, E. (2021). Reigniting Economic Growth: Lessons from three centuries of data (No. 854). Economic Research Southern Africa. https://econrsa.org/publications/reigniting-economic-growth-lessons-from-three-centuries-of-data/

• Havemann, R., and Hollander, H.. (2022). Fiscal policy in times of fiscal stress: Or what to do when r> g. No. 2022/52. WIDER Working Paper, 2022. https://sa-tied-archive.wider.unu.edu/article/fiscal-policy-times-fiscal-stress-or-what-do-when-r-g

• Sachs, M., Ewinyu, A.K. and Shedi, O. 2022. Public Services, Government Employment and the Budget. Public Economy Project. SCIS Working paper | Number 39. https://www.wits.ac.za/media/wits-university/faculties-andschools/commerce-law-and-management/research-entities/scis/images/PEP%20Public%20services%20and%20employment%20rep ort_WP39.pdf

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