# 1. Introduction

Fiscal stabilization works to effectively maximize the effects of fiscal policy on output while avoiding a sustainability trap (both from a liquidity and solvency perspective). If governments run large deficits and accumulate debt it detracts from future spending as financing deficits requires revenues to service debts and/ or spending cuts. Consequently, the “when and how” to spend are critical for fiscal policy plans. During economic downturns, fiscal policy can be used to cushion some of the adverse economic shocks and help stabilize the business cycle. However, the scope of economic downturn intervention is partly determined by how much fiscal space government created during economic booms. A large saving during booms implies that governments have more room to intervene during recessions. However, fiscal policy can destabilize the business cycle by being procyclical – that is, expenditures increase when there are booms and decreases when there are recessions. This type of policy may prolong business cycles and may create fiscal sustainability concerns, limiting the generation of fiscal buffers.

In this paper we analyze the fiscal stance of selected emerging markets and developing economies (EMDEs), and how the commodity super cycle affected it. South Africa will serve as an illustration of our argument. In a nutshell, we argue in this paper that the long commodity super cycle created the mirage among policy makers that the cycle had become the trend, in other words, that growth had structurally—rather than temporarily—increased. This allowed for higher expenditures, commensurate with higher economic potential. This miscalculation inadvertently supported pro-cyclical policy, as expenditures rose with the (long) cycle rather than with potential. When the cycle ended, it became clear that governments had saved less than they should have to create the fiscal buffers needed to stimulate their economies.

Commodity super cycles are not infrequent. According to World Bank (2015), four commodity super cycles can be distinguished since the 19<sup>th</sup> century: from 1894 to 1932, from 1932 to 1971, from 1971 to 1999, and, most recently, from 2000 to 2015. We focus on this most recent commodity super cycle. Figure 1 illustrates the magnitude of the cycle for key commodities.

**Figure 1: The 2000-2015 commodity super cycle**

_(index, 1990=100, real 2010 US dollars)_ <!-- Start of picture text --> 400<br>350<br>300<br>250<br>200<br>150<br>100<br>50<br>0<br>Energy Agriculture Metals & Minerals Precious Metals<br>1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017<br><!-- End of picture text --> Source: World Bank Pink Sheets, 2018. Note: Agriculture includes beverages, food, and raw materials (timber and other).

EMDEs managed to significantly reduce public debt levels during the early 2000s, partly with the additional resources associated with the commodities boom. Public debt fell from 52.1% of GDP in 2002 to 33.9% by 2008 (Figure 2). Then the global financial crisis struck, followed by a global economic downturn. Commodity prices dipped briefly in 2009, but returned to elevated levels until 2