During a webinar last week, two senior investment professionals at Coronation, Karl Leinberger and Neville Chester, debated their different views about the future of South Africa. Karl was more negative about our future and predicted a 0% GDP growth for the next ten years and a 70% chance of us succumbing to a debt trap in the next five years, where the government debt is so out of control that it passes the point of no return. In emerging economies a debt trap is triggered when the debt-to-GDP ratio passes 60%. In developed economies that trigger sits at 100%.
Neville was not as negative and predicted a GDP growth of 1,25% and a 30% chance of a debt trap. Most countries have a big debt problem, exacerbated by the Covid-19 pandemic, but developed economies are more likely to get themselves out of the death spiral by imposing austerity measures, raising taxes or waiting for inflation to eat away the problem. Unfortunately the South African government will not consider austerity measures due to their populist philosophy. Taxes in South Africa are already at eye-watering levels and inflation is dependent on economic growth, which is non-existent.
Another problem we have is the precarious and volatile rand. Currently foreigners own around 30% of our government bonds, down from around 40%. If they decide to sell these bonds, the rand will weaken substantially which will make our debt repayments even more cumbersome. We can also follow in the footsteps of Argentina and Venezuela and default on our bonds, which will see the rand collapse.
Ultimately it is the political will that will determine the fate of our country. Neville is of the opinion that the politicians are aware of the problems and will do the right thing for the economy. If this should happen, we will see our bonds and equities perform very well due to their low valuations. He is hanging his hat on basically only Tito Mboweni and Lesetja Kganyago.
If, however, you look at the politicians who are currently calling the shots, like Patel, NDZ and Cele; with Ace, Mabuza and Malema in the background; and Cyril acting as figurehead in his second and last term, you will have to be a very optimistic person to imagine that these people will defy the trade unions demanding higher wages; jail their corrupt colleagues; let bankrupt SOEs go under; and lower taxes on SMEs so that they can prosper.
It has to be said, though, that South Africa can be turned around. That we can become a flourishing country again. History has shown us that countries flattened by catastrophe can get up and become successful again.