South Africa has a growth problem, not a debt problem, and structural reforms proposed by ratings agency Moody’s is not a solution for the short term, said Duma Gqubule, founder of the Centre of Economic Development and Transformation.
Gqubule was speaking at the Black Business Council (BBC) conference at the Radisson Blu in Sandton, on Monday. He spoke on ways to boost economic growth, as an imperative to achieve transformation goals.
“Despite fear mongering from ratings agencies, South Africa does not have a debt problem, it has a GDP growth problem,” he said. Gqubule questioned the credibility of ratings agencies and their role during the Global Financial Crisis (GFC) in 2008.
The agency itself did not say that South Africa has a debt problem, but that one would develop if South Africa did not improve its GDP growth, he explained.
“If we listen to what ratings agencies say what we must do to get growth, we won’t get growth,” he told Fin24. In a credit opinion recently released by Moody’s the agency indicated that it was concerned about the continuity of structural reforms to ensure economic growth.
“There is no evidence anywhere in the world where structural reforms delivered growth,” said Gqubule. He listed Greece as an example of a country which faced a 25% loss of its GDP despite implementing structural reforms.
Structural reform is the International Monetary Fund’s (IMF) code for labour market flexibility and privatisation, he said. Structural reform is known to incur short term costs and will not solve the growth dilemma. This is something the country can’t rely on as a “boost” in the short term when there is an employment crisis that must be addressed.
Instead Gqubule proposed a fiscal stimulus of 3% for GDP, this is R400bn over three years. South Africa has one of the lowest debt to GDP ratios in the world and can afford to take on more public debt, he explained.
This can be funded through quantitative easing introduced by the South African Reserve Bank (Sarb). Further, the Public Investment Corporation (PIC) should liquidate some of its assets and purchase government debt, he explained. Government debt on the private sector should be increased. And consumption spending should be redirected to infrastructure.
“Countries which have recovered from the Global Financial Crisis introduced fiscal and monetary stimulus, but South Africa has not done that,” he said. He added that the GFC was a “rich country affair” and that developing country’s did not undergo a banking crisis because at the time they had implemented expansionary fiscal and monetary policies.
The Sarb’s role on the GFC
Prior to the GFC, the Sarb increased interest rates 250 basis points in June 2007. Following the GFC, the Sarb increased rates by another 250 basis points. “Our downturn happened before the Global Financial Crisis,” he said.
Ten years on, South Africa faces a crisis of collapsing GDP growth and rising unemployment. Gqubule said that the role of the Sarb during the GFC has been ignored and said that the central bank was implicated in the last three recessions in the country.
The Sarb has continued to increase interest rates despite growing unemployment. “The single-minded focus on inflation is damaging the country.”