David Gracey

David Gracey

David Gracey | Head of Foreign Exchange and Fixed Income Trading

2 cents versus R500 billion | Currency Comment

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Here’s my 2 cents worth on President Ramaphosa’s announcement. Now I know my 2 cents is not a lot when compared to R500 billion, but then R500 billion Rand is not as much as it was just 10 years ago.
 
To illustrate, 10 years ago, it would have been worth about USD70 billion, now it’s only about USD26 billion – that’s what 10 years of mismanagement, graft, corruption and daft policy, does to one’s wealth.
 
Anyway, R500 billion is still a substantial amount of money, and on one level I do applaud government’s efforts to support and provide assistance to the vulnerable. On another level, I want to scream in anger. If there had not been so much squandering and theft during the previous Presidency, then we would not find ourselves in such a dire economic position. But I guess it is what it is and here we are.
 
Of the R500 billion, an amount of R130 billion would be reprioritised from the current budget. The remainder is to be sourced from sources such as the Unemployment Insurance Fund, as well as international finance institutions such as the World Bank and International Monetary Fund.
 
Of course, loans have to be repaid at some point, even if the interest rates are low. And the R500 billion (+ interest) repayment will have to be generated from future economic growth once Covid-19 has been dealt with.
 
This is where my concerns become evident. If we have more than tripled our budget deficit over the last 15 years, because we could not generate the growth required to reduce our funding requirements, how are we going to be able to repay the additional funding required when it becomes due?
 
This is where it becomes a little scary for me, because I do note that some economic lunatics are advocating that the money simply be printed.
 
We already have a central bank that’s buying government bonds (not unlike other places in the world), but from there it’s not a massive stretch to simply fire up the printing presses and monetise that debt.
 
And so once again I am left with one conclusion: Over the longer term all of this can only be ZAR negative. Yes, the rand has already weakened substantially over the last few weeks, and corrections and pullbacks can be very severe. However, in the longer term we have just added 10% of GDP to our national liability pile, and right now, even before Corona, there is no GDP growth to make even a small dent.
 
To be sure – this is not a criticism of the package announced by Mr Ramaphosa. Millions of people are vulnerable and starving. Perhaps as many as a million others are set to lose their jobs in the next few months. It is a crisis of monumental proportions and required serious government interventions.

It is however a criticism of the previous 10 years. Were it not for that debacle things could have been very different.
 
Comment and rates accurate as at 22 April 08h00.