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Staring Down the Barrel: The South African Fiscal Deficit and Hyperinflation

The South African government is in an unenviable position. They must save an economy that is structurally broken, has the highest income inequality in the world and the highest HIV/AIDS rate, all while combatting COVID-19. The government faces a choice: use the COVID-19 crisis to reform the economy or continue the trend of ‘decision paralysis which would likely lead to a dreaded L-Shaped recovery and years of debt distress. Put differently there could be an orderly drawing down of the government balance sheet to finance a temporary shock or there could be a collapse into national bankruptcy.

History teaches us that during a time of crisis, which COVID-19 certainly is, radical policy interventions occur more frequently. The Great Depression, World Wars, Revolutions all led to government policies that were thought impossible during non-crisis times. Throughout the world, once unthinkable monetary- and fiscal policy interventions have already taken shape in response to the COVID-19 crisis. Now is certainly South Africa’s chance to reform, but what will these interventions entail, if any? Will these interventions remain for the longer term and what will the economic impact be, especially for South Africa?

Working at a hedge fund means we spend an inordinate amount of time thinking about how to manage risk, which means we must look at all scenario’s regardless how outlandish. Playing devil’s advocate to come up with alternate views is therefore part of our daily routine; if we didn’t, we would be doing our investors a disservice. This led us to ask the question: Will the COVID-19 crisis eventually lead South Africa to high inflation or even hyperinflation?

About Black Mountain Investment Management

Mohamed Dhorat, CFA, Co-CEO & Fund Manager

mohamed.dhorat@bmim.co.za

Craig Lyall, Co-CEO & Fund Manager

craig.lyall@bmim.co.za

Wihan Horn, Analyst

wihan.horn@bmim.co.za

BMIM is a licenced financial service provider that focuses on alternative asset management – hedge funds and principal investments. The business is based in South Africa operating from Johannesburg and Cape Town.

This presentation is being circulated to a limited number of sophisticated investors on a confidential basis as an information-only document. It is distributed with the view to establishing the basis for further discussions on the content described herein.

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