Photo: Joe Biden / Twitter / POTUS Account
Photo: Joe Biden / Twitter / POTUS Account
Late last Wednesday night in Washington DC, US lawmakers in the House of Representatives voted to pass the final version of President Joe Biden’s fiscal stimulus package.
Why should this matter, particularly for South Africans? Why should anyone but Americans care?
There are three reasons why everyone in the world but particularly those in emerging countries like South Africa should consider the passing of this bill and the effects of it.
First and most fundamentally is the size. This gargantuan injection of brand new hard cash into the US economy is so unassailably vast, so stratospherically and incomprehensibly colossal, that it is almost impossible not to use hyperbole and overemphasis when describing it.
Totalling $1.9 trillion, the stimulus is 8.5% of US GDP. The package alone is a staggering five and a half times the whole of South Africa’s GDP. The sheer magnitude of this investment can, must, and will have global economic ramifications which will stretch to South Africa.
Secondly, the US economy is not teetering. We are not in a situation like 2008 where many in the US were highly indebted and many are in negative equity after a collapse in house prices. The average American is, on average, less indebted and with higher savings than at any point in the last 20 years. This will bring more cash into an already cash flush consumer economy. Because of this, the global economic effects could be incendiary.
Thirdly, this is all new money. In South Africa we once had a ‘stimulus’ too, announced back in the dark and distant early days of the pandemic in April 2020. It feels like another age. But by contrast, that package of R500bn (or $33bn) barely had any new money; it was either repackaged spending from elsewhere in the budget, central bank guaranteed loans to businesses which overwhelmingly have never materialised, or unemployment support from the UIF which would have happened anyway.
In America, it is more straightforward. Treasury is borrowing $1.9tn of new money, and Treasury is spending it. It will largely be in the form of $1400 checks to every means-tested American, a weekly top-up of $330 in unemployment benefits, an additional $350bn in state aid direct to regional governments for investment projects, and an expansion of tax credits for children. The OECD, the Paris club of rich nations, estimates that this package will alone add 1% to US GDP in 2022.
Finally; we live in an international, interdependent and still deeply globalised world. If butterflies in the Amazon can create storms in East Asia, something of this order of tectonic magnitude will have profound effects on all economies, but particularly those that are emerging and with close links to the US economy like South Africa.
An overheating US economy will in all likelihood mean that interest rates will rise, and higher interest rates in the US could spill over globally. Poor countries that borrow in USD will find it hard to adjust to this which could lead to a wave of emerging market defaults. Although South Africa borrows predominantly in Rands, our rapidly increasing public debt load with higher interest costs will make the country more vulnerable to higher budget deficits and leave SA more likely to fall into a debt spiral.
In the meantime, higher interest rates in the US will suck capital out of economies like South Africa, strengthening the dollar and weakening the rand. This would be essentially inflationary. In addition, a booming US economy will devour commodities used for infrastructure, and while this may be good for SA commodity exporters, the cost of imports like oil will also increase.
Macroeconomically, a stimulus package like this is not always constant sum; what is good for America can be destructive for everyone else, especially in the emerging world.
However, this is not all doom and gloom. A booming US economy could create great opportunities for South African businesses and exporters that are ready and willing to exploit them. More growth in America could positively benefit the economic fortunes of a middle-sized economy at the tip of Africa.
It is up to South African businesses and entrepreneurs to make the most of a remarkable moment.