Sep 12 2008

Budget 2008/09: No sign of populist pressure

Published by at 9:48 pm under Opinion,South Africa

First published on my old blog on 21/2/2008. 

Trevor’s 2008 Budget is another reason to believe “populism” or “socialism” will not rule in South Africa under Zuma, after all. It was another solid, balanced Budget in the mould we’ve come to expect of the man.

Free of any indications that he drew it up under pressure from Cosatu or any other radical force. 

The one interesting thing was the slackening of the foreign exchange rules for institutional investment. The timing is interesting. This step could put downward pressure on the rand. That Trevor elected to introduce another element which could bring downward pressure to the already-volatile mix, points to one of two things: Either government has decided it wants the rand to depreciate. Or, they are simply so confident that they don’t see this step as a potential downward force. 

I go for the first option. I think they have realised the rand has become overvalued in the last 3 years – by a lot. Despite what the private sector economists say (they think the rand was OK at around R10 to the Euro). I think the rand should be between R12 and R13 to the Euro. And I’m still pretty convinced that’s where it’s heading. 

To forecast a strong drop in the inflation rate (as Trevor did in his budget) in the next fiscal year, while the rand is on it’s way down and the politics are “shaky”, to put it nicely, is a bit overoptimistic, I think. 

Why is the rand over-valued? Because the official inflation rate (as calculated by a government institution) has consistently (and probably deliberately) been under-measured. I have no scientific basis for this believe. I simply base it on my experience when I holiday in SA once a year. The way prices have risen, is unbelievable. 

I pity the locals. And the truth is hidden by government under their “relatively low inflation numbers”. So, year after year employees get inflation-adjusted salary increases which are too low – and over the past 5 years this effect has added up to cut the buying power of the man in the street something terrible. 

That the man in the street doesn’t know what is happening, is perhaps understandable. But, that economists and the forex market haven’t picked up on it and made a noise, I find disappointing.

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