global economy

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The most important thing in SA politics? ‘Events, dear boy, events’

Whether or not the sunlit uplands depicted by both the President and Minister Tito Mboweni should transpire is, almost certainly, not up to them.

global economy

Image: Adobe Stock

These are always busy weeks for those following South African politics. First up is the President to opine his views on ‘The State of the Nation’.

I needn’t rehash what those were this year, although the fact that I struggle to remember them may be indicative. Then, in late February, is the arguably more critical Budget speech.

How much revenue is being generated from the fiscus?

This is the moment where the man tasked with the second most important job in government but which is perhaps more essentially influential in all of our daily lives has to give his thoughts on the economy. More essentially, how much revenue is being generated from the fiscus? What it is going to be spent on, and for the balance that will be borrowed how do we intend to pay it back?

However, what the last few weeks have taught us is that the above is barely of any importance at all.

When asked what the most important things in politics are the ex-British Prime Minister Harold Macmillan is (possibly erroneously) reported having said, “Events dear boy, events”.

Whether or not the sunlit uplands depicted by both the President and Minister Tito Mboweni should transpire is, almost certainly, not up to either of them. The somewhat frightening irony is that, at almost the same moment as the Budget speech but because of completely unrelated occurrences, international bond investors caught fright.

After four decades of somnambulantly wandering along with each year showing better returns and lower yields (in the back to front world of bonds yields move inversely to values), at some point over the last few weeks they seem to have woken up. Who will know what did it? Was it being stuck at home for a year and being shaken into submission by a home-schooled 4-year-old? Was it a group of Mad Max lookalikes storming the Capital? Was it President Biden’s decision to give every American another $1400 in the form of cheques signed by the resident of 1600 Pennsylvania Avenue himself, when actually the majority of Americans have rarely had more money to spend after being locked at home without access to a mall for the last 12 months? Or, perhaps it was the fact that Texas – yes, the Lone Star State which usually brings to mind scorched deserts – was recently covered in snow and ice resulting in a surge in energy prices? Maybe a mix of all the above.

The implications of this on markets have been profound

Either way, suddenly a word which we had almost totally forgotten about began resurfacing in broker notes and Bloomberg news feeds: inflation. Pitch decks from the mid-1970s were dusted off and reformatted. And with that, the aforementioned bond traders now stuck at home in their Aspen cabins or Palm Beach condos decided to do what any fixed-income investor has been taught to do when faced with the threat of rising prices and hence interest rates. They hit sell.

The implications of this on markets have been profound. The benchmark of international bond prices, the US 10 year, has rocketed to its highest level for two years. Other global bonds such as Australian, the UK and eurozone, followed suit. As did, naturally, South Africa.

After hitting a low around the time of SONA they have weakened almost a quarter with current SA 10-year rates over 9%. All of this, potentially, could matter far more for the future of South Africa than anything opined by the great and the good in Parliament. Inflation will hurt consumers, especially those for whom food and transport are their major expenses.

Sell-offs in the bond and equity markets will decimate savings

Higher interest rates will choke off any economic recovery which may be nascent in a post-vaccine South Africa. Sell-offs in the bond and equity markets will decimate the savings of South Africans which are overwhelmingly in pension and provident funds.

And finally, there will be no hope of an investment-led economic recovery in SA if that investment is sheltering at home, in the developed markets of the north. I have no doubt that the Honourable President Ramaphosa and Minister Mboweni are sincerely hoping at this point that they are not about to be taught a lesson about the importance of the most important thing in politics; “events, dear boy, events”.