IN THIS WEEK’S BOTTOM LINE
CONTRIBUTED BY GIELIE FOURIE | OVERBERG ASSET MANAGEMENT
Why might a country go into an economic or financial crisis? Perhaps it has mismanaged its economic policies. Commodity prices could have collapsed, or it faced a natural disaster. Or it has large debt payments. What does a country do in such an event?
INTERNATIONAL MONETARY FUND (IMF): The IMF was established 74 years ago to provide emergency financing to countries experiencing financial distress. Without such financing, the impact on a country and its people could be devastating. When all other lending options have been exhausted, countries often approach the lender of last resort, the IMF.
THE IMF – A SHORT HISTORY: The IMF formally came into existence on 27 December 1945 after the Bretton Woods Conference in the Mount Washington Hotel in Bretton Woods, New Hampshire, USA. It was the brainchild of HD White (USA) and John Maynard Keynes (UK). Today the IMF is one of the key organisations of the international economic system. It is headquartered in Washington. On 1 October 2019, Kristalina Georgieva succeeded Christine Lagarde as the Managing Director and Chairwoman of the IMF.
THE IMF’s MANDATE: The IMF provides short term loans at interest rates much lower than the market. It also provides zero-interest loans to poor countries. Because IMF lending is fast and flexible, it gives countries breathing room by allowing them to meet their immediate financial needs. That breathing space gives them time for new policies to have an impact. The IMF works with countries to resolve issues that led to the economic crisis, in a way that puts the economy on a firmer footing, while paying attention to protecting the poor and vulnerable.
These groups are typically affected the most by crises. The IMF's involvement sends a strong signal of support to private investors and banks. This helps to give investors the confidence to come back and invest. Regaining this additional source of financing further helps the country to get back on its feet. The IMF currently has lending arrangements of about $185 billion with 36 countries.
IMF LOAN CONDITIONS: When a country borrows from the IMF, its government must undertake to adjust its economic policies to overcome the problems that led it to seek financial aid in the first place. IMF loans are not FDI (Foreign Direct Investments). IMF loans are repayable. The IMF doesn’t insist on collateral, but their loan conditions are uncompromising. Governments are forced to correct their macroeconomic imbalances via policy reform. If the conditions are not met, either funds are withheld, or repayment is enforced.
THE IMF and The Washington Consensus: Whenever the IMF helps countries financially, they enforce the so-called “Washington Consensus” - a "standard reform package” of ten economic policy prescriptions. Four of them are: (1) Austerity – for example reducing government budget deficits through spending cuts, tax increases, or a combination of both. (2) Improving governance and fighting corruption. (3) Privatisation of SOE’s (state-owned enterprises). (4) Trade liberalisation - lifting import and export restrictions. When the IMF joins the party, the Public Sector is basically in a state of “Business Rescue”. They won’t tolerate political interference. The IMF don’t demand collateral – but they will ensure that countries “pay back the money”.
ALTERNATIVE No 1: An alternative to IMF assistance? DIY (do it yourself). Our government is exactly on such a course. If government borrows R250 billion to bail out Eskom, it will increase our Debt: GDP ratio. So, they came up with a “brilliant” plan – the PIC (Public Investment Corporation) will invest R250 billion in Eskom. The DBSA (Development Bank of SA) will invest R3.5 billion in the SAA (SA Airways). Loans are guaranteed by Government - read “taxpayers”.
Loans will not appear as a debt on the National Balance Sheet. The “advantage”? The ANC will stay in control of the economy. Control won’t be handed over to the IMF. The ANC’s head of economic transformation, Enoch Godongwana, wants to keep control at all costs. Is it a coincidence that Godongwana is also the chairman of the DBSA?
ALTERNATIVE No 2: Another alternative to an IMF bailout, is to increase the prescribed assets, mainly SOE’s, for pension funds. Pension funds have investments of more than R6 trillion. It is an attractive pot to plunder – very easy to shave off a percentage, or five. Unfortunately, prescription diverts funds from successful projects to unsuccessful projects.
Historically, prescribed assets provided much lower returns than discretionary investments - prescribed assets erode savings. It would be better to invest in cash deposits. Should savers support dysfunctional SOE’s, or even a dysfunctional State? Prescription is an indirect tax on savers. Rather take a once-off 5% levy and stop the prescribed assets option.
CONCLUSION: We believe there is a third way to turn SA around - first address the root causes of the problem, corruption and bad governance. If government can stamp out corruption, we can save R400 billion in just one year – enough to save Eskom. We need strong leadership to turn our economy around. We need bold action – good intentions are not enough. Just yesterday Pres Ramaphosa wrote in his Newsletter: “Our institutions are robust”. “Mr President, you know it is not true - we need bold action from you, now.”
Read More: Overberg Market Report 11 February 2020