South Africa: Macro-Fiscal Flows And Investment Markets

Includes: EZA
by: Alan Longbon

Macro-fiscal flows have increased and accelerated in 2017 propelling the currency and the stock market with it.

Rising commodity prices have led to an improvement in the current account.

Private credit creation is booming and adding over 4.5% of GDP to the private sector each year off a low debt base.

A government spending boost midyear has led to a bumper year for the private sector but may not bode well for President Zuma as bondholders seek his removal.

The purpose of this report is to see the impact of macro-fiscal flows on investment markets in South Africa.

To calculate the macro-fiscal flows, an assessment of the national accounts is used.

One can summarize the national accounts in the following formula:

GDP = Private Sector Spending [P] + Government Sector Spending [G] + External Sector Spending [X]

These are accounting entities and are true by definition.

See the methodology section below for more detail on this formula.

The private sector is where the stock market is, and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks: Banks lend more than is repaid in loans. Credit money. Also known as inside money and is has a repayment liability attached to it.

  2. Externally from overseas commerce: Exports bring in more than imports cost. Combination of credit money and state money from overseas.

  3. Government spending: More is spent than taxed. Known as state money, outside money, sovereign money and high powered money. This is the best sort of money as there is no liability attached to it.

In an ideal scenario, the private sector would receive large and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative.

We will look at each inflow in turn and start with the private sector, all the while updating our forecast result based on the latest data.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The chart shows that in 2017 private credit growth was strong. The growth rate, shown below averaged over 6% and contributed around US$13.3B or 4.5% of GDP into the private sector.

The chart above shows the money supply is going up, so there is net income coming into the private sector and a good portion of it is inside money from banks.

The flow of credit adds to the stock of private debt in the economy, and this debt is shown in the chart below.

(Source: Professor Steve Keen)

The chart above shows that South Africa has a relatively low level of private debt at a modest 74% of GDP. The Anglo-American nations are all well over 100% - Canada and Australia are double that.

South Africa is a banker's dream. A whole nation of people with low debt able to take on more debt. South Africa has a significant capacity for a credit-induced bull run at some time in the future, and it looks to be in progress now. Household private debt is at a tiny 37% of GDP. History shows this can go to 200% before it stops. There is the potential for over $200B of credit creation possible to bring South Africa to a similar private debt level as Canada and Australia.

Professor Steve Keen's work has shown that a private debt level of two times GDP is not sustainable and will lead to a financial crisis as the debt servicing costs become a significant portion of aggregate demand. What people spend on debt serving they cannot spend on real goods and services. Production goes unsold. Firms cut production and a downward spiral of production cuts, job losses, lower aggregate demand sets in until GDP matches gross domestic income [GDI] once again.

GDP = GDI, another immutable accounting entity that is correct by definition.

External Sector

The external sector is trade and commerce with other countries and shown in the current account. The current account is exports minus imports, and it also includes capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. The chart shows the current account is negative and draining the private sector of funds.

The result for 2017 looks to be half the deficit of 2016 and so is trending in the right direction.

Government Sector

The government budget is shown in the chart below.

The chart shows that over the last year, the government has been spending into the economy and adding to net financial assets in the private sector. This is a positive trend.

2017 looks to be an input of 7.3% of GDP or about $US21B. The final number will be confirmed upon release of the December 2017 number. So far this is a bumper year.

As soon as a government deficit spends the bond markets and rating agencies turn against it. This is because the government is issuing state money that has no liability against it, thus cutting out private financiers. Any politician that does this is doomed and will be vilified in the popular press and world stage and made to exit as soon as possible.

This has happened to President Zuma, who has been made to exit and will be replaced with a bond market-friendly national leader in due course.

In this article, one can read the common themes of deficit spending, bond market displeasure, accusations of corruption, political change and the need to curb the widening government deficit are explored in classic neoliberal mainstream propaganda. The devil wins when you do not notice that he is there.

South Africa is a sovereign nation and cannot ever run out of its currency as it is the issuer of the rand; there is no default risk. Any default will be by choice rather than function due to the adherence to a set of voluntary budget constraint rules. The rand incidentally has been getting stronger and not weaker since the government began increased deficit spending, as the chart below shows.

Inflation has fallen as the chart below shows.

If increased government deficits are inflationary, where then is the evidence? Rates are falling, not rising. This means the increased spending is going into productive capacity and NOT chasing prices higher.

Why would President Zuma be engaging in increased deficit spending? Could it be the Great Depression levels of unemployment shown in the chart below?

Could it be the weak infrastructure system documented in these two articles here and here? The new deputy president favored to take over from Zuma - who is, therefore, the bondholder spokesperson - says there is no money for power stations. This is despite the fact that South Africa is a sovereign nation with its own issued currency and has rand in the same way that a referee has points at a football game. To pay its bills, the government merely has to send instructions to the commercial bank where the recipient has their bank account, that the number be increased by the size of the purchase made. This is how a modern government spends and is how state money is created. Bonds and taxes do not play a role in this process and are leftovers from the financially constrained gold standard age that ended in 1971.

The finance industry will fight tooth and nail to preserve its role as the creator of credit money and sees any use of state money as a direct attack that must be stopped at all costs.

If ever there were a case for classic Keynesian style fiscal spending New Deal Roosevelt style economic programmes then South Africa is it. And for doing the right thing, Zuma has to go, say the bondholders - and they are making their moves against him.

Sectoral Analysis Methodology

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upward, this sector needs to be growing. This sector by itself is an engine for growth and innovation. However, it requires income from one or both of the other two sectors to grow.

The government through its treasury sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary, and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a deficit with a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector trades with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upward, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the flow of income.

The following formula can express this relationship:

GDP = Private Sector spending + Government Sector spending + External Sector spending

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall.

Conclusion, Summary, and Recommendation

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation


Government Sector


External Sector





4.2% 3.9% -3.3% 5.1%










(Source: Trading Economics and Author calculations based on same)

*Estimate until actual figures are reported.

#Forecast based on present trends.

The South African sector flows are positive and strong at just over 10%. Going forward we have:

1. Private credit creation is strong and growing in a low debt environment, and so has years of growth left before the servicing cost erodes aggregate demand and causes a financial crisis.

2. The current account is improving year over year as commodity prices rise.

3. Government sector spending is at risk. If President Zuma is removed and replaced with a bond market-friendly president then this vital flow of state money will decline or reverse. Austerity programmes are likely to be brought in and the domestic economy again starved of infrastructure, health and education investment. Already in poor condition state infrastructure can only get worse and productivity with it.

There is scope for financial assets such as stocks, bonds, and real estate to rise given that the private sector is receiving a positive and accelerating inflow of funds.

I first reported on South Africa in this article, and since then, the share price has risen 62% and paid a 1.48% income dividend. The bias now strongly upward.

I last reported on South Africa in this article, and since then it has risen 27%. At the time of that article, the direction of government spending was quite different, and the most recent result showed a nasty blue surplus being drained out of the private sector by the government. This trend has since reversed, and the big game-changing government expenditure of July 2017 took place and turned 2017 into a bumper year for the private sector. Despite the above, South Africa was and remains a buy recommendation and shows how quickly the situation can change.

South Africa is still a buy; however if Zuma goes and his policies with him, be ready to exit the investment. While bondholders may not be happy with him, the stock market and population are benefiting from his government spending and may cause him to be able to stay.

An investor wishing to have exposure to the South African stock exchange can do so through the following ETFs:


iShares MSCI South Africa ETF (EZA)









Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EZA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.