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Prospects of the South African Economy in 2018

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The South African economy in 2017 experienced a fluctuating growth quarter-onquarter basis. The economy grew 2.0% in the third quarter of 2017 (seasonally adjusted and annualised), down from a revised 2.8% in the second quarter

Agriculture, mining and manufacturing were the main drivers of the expansion, while there was a contraction in general government services resulting from low employment numbers in the public sector. After recording an increase of 38.7% in the second quarter, the agriculture industry continued to power ahead, expanding by 44.2% in the third quarter.

This is the largest quarterly jump in agriculture production since the second quarter of 1996. Increased production of field crops and horticultural products were the main contributors to growth, with notable increases in the production of maize and vegetable products. That season’s maize crop is expected to be the largest on record.

The Crop Estimates Committee pegged commercial maize production for that season at 16.74 million tonnes, more than double the 7.78 million tonnes produced last year (2015/16), and higher than the current record of 14.66 million tonnes harvested in 1980/81.

Mining and manufacturing were the other major contributors to economic growth in the third quarter. Increased gold and platinum production saw the mining industry grow by 6.6%, while the 4.3% rise in manufacturing was spurred on by increased production of both petroleum and metal products.

Finance and business grew by 1.2%, helped along by increased activity in financial mediation, insurance and auxiliary services. There was also positive growth in personal services (0.9%) and transport and communication (0.6%).

Four industries, however, saw a decline in economic activity in the third quarter. Falling employment numbers in the public sector saw general government services posting its third consecutive quarter of negative growth, contracting by 0.7%. Other notable industries that saw a decline were trade and electricity, water and gas.

Despite a rebound in retail trade sales, falling wholesale trade sales pulled the trade industry down by 0.4%. The electricity, water and gas industry experienced a 5.5% contraction, a result of falling electricity generation and demand.

Other highlights from the third quarter 2017 GDP release:

  • Unadjusted real GDP was up by 0.8% yearon-year in the third quarter of 2017.
  • The South African economy grew by 1.0% in the first nine months of 2017 compared with the first nine months of 2016.
  • Nominal GDP in the third quarter was estimated at R1.17 trillion.
  • Expenditure on GDP grew by 2.1% in the third quarter, spurred on by a rise in household consumption spending and fixed investment. There was, however, a fall in government consumption spending. Exports were down, but imports were down more, resulting in an improvement in net exports (i.e. exports less imports) and, consequently, a positive contribution to total growth from the external sector.

Economic growth is projected to pick up moderately in 2018-19, as stronger activity in trading partners boosts exports. Investment will support growth in 2019 on the assumption that business confidence increases and policy uncertainty fades.

Despite persistently high unemployment, private consumption will expand as wages increase moderately and food prices stabilize. Falling inflation leaves room for a moderately expansionary monetary policy to support activity. Unexpected slippage of the budget deficit is contributing to growth in the short term, but is also creating more pressure to contain rising public debt and is raising the risk of a further credit downgrade.

Improving the efficiency of public spending and better controlling the deficits of stateowned enterprises are necessary to raise fiscal credibility and create room for public investment to foster growth and reduce social inequality.

The high dependence on external financing is the main source of financial vulnerability. Low investor confidence and credit rating downgrades in 2017 have contributed to a net outflow of foreign investment.

To cushion the transmission of external shocks to the financial system, implementation of the financial sector regulatory reform should be accelerated and foreign-currency-denominated debt issued by private entities further monitored.

Growth is weak as policy uncertainty persists

Economic growth is slowly improving following the drought in recent years, driven by a recovery in agriculture and favorable commodity prices. However, political uncertainty has eroded business and consumer confidence. The deterioration of the fiscal stance will not help to bring back confidence.

Unemployment remains high, reflecting skill shortages and weak investment, and weighs on household consumption. Inequalities in opportunities and incomes remain high.

Policy reforms are needed to boost growth The fall of inflation into the target range (3% to 6%) has opened up space to adjust policy rates to provide stimulus for investment. The central bank already reduced its repurchase

rate from 7% to 6.75% in July 2017. A further adjustment is projected in 2018 as inflation remains within the target range.

The government budget deficit is overshooting due to significant shortfalls in tax revenue and high spending, particularly in the areas of debt-servicing costs, education and defense. The government will have to prioritize expenditure.

Although the widening deficit will support short-term growth by partially sustaining household consumption through social grants, the rising debt makes consolidation imperative to maintain market confidence. Increasing the efficiency of public investment in infrastructure is much needed to boost productivity.

Reforms to ease the cost of doing business, boost entrepreneurship, lift competition barriers in many sectors and facilitate the expansion of firms in the neighboring region would boost productivity and help create jobs. Growth is projected to increase Favorable terms of trade are projected to continue to drive export growth. The introduction of the proposed minimum wage can boost consumption slightly and reduce income inequality.

However, investment will remain weak in 2018 as political uncertainty remains high. Inflation is expected to remain in the upper half of the target range, driven by a stabilization of food prices and a moderate oil price development that counter balances a potential rise in electricity tariffs. The main risks to growth are policy uncertainty and external factors.

Foreign-owned debt is relatively high compared to other emerging market economies; indeed, the majority of the external debt of state-owned enterprises, banks and corporations is in foreign currency.

Further credit rating downgrades could increase the cost of hedging or raise collateral requirements for foreign currency risk. Uncertainty surrounding Brexit may affect exports and financial flows with one of South Africa’s largest European trading partners.

On the upside, the growth outlook could be better if higher-than-assumed commodity prices or capital inflows would provide further impetus to domestic demand. A stronger-thanexpected recovery of business confidence could provide a boost in investment.

 

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South Africa

Tito Mboweni’s Budget for the Tough Times: Planting the seeds of future economic success

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Finance Minister, Tito Mboweni, delivered South Africa’s 2019 Budget on 20 February – against a challenging economic backdrop of 1.5% growth, a deficit forecast valued at 4.5% of GDP in 2019-20, and the ongoing Eskom power crisis. The budget acknowledged the difficult issues facing the South African economy but included a range of measures to help solve them, including numerous changes to the tax regime and the introduction of a carbon fuel tax.

Mboweni took a firm, practical approach in his 2019 statement and signaled that the time has come for decisive action. Striking a hopeful tone, the Finance Minister pointed out that his budget did not include “quick fixes” but was a way to “plant the seeds” of future economic success.

The budget can only be seen as a budget for the tough times. It is a budget that keeps an eye on the elections, without being a spendthrift. Though very little was given away to any one sector, given the constraints, it should be said that there was a lot of common sense in the narration.

The most notable announcement to come out of the budget is the introduction of a “chief reorganization officer” for all state-owned entities (SOEs) seeking a government guarantee. This is common sense. Under business as usual, SOEs have gone on spending without regard for the liabilities they were imposing on the general discus. Leaders of these companies went out and fulfilled political objectives that did not have any relation to South Africa’s reality of economic struggle and difficulties.

Eskom’s decadence is especially galling and risky for the discus, given the rate at which the company has accumulated debt since 2007, with its debt rising from R40bn, to R420bn in 2018.

At the same time, the minister soft-landed the very necessary debate about the role that SOEs play in South Africa’s economy. In the past, the minister has made clear his aversion to the state owning some entities such as South African Airways which plays no role whatsoever in contributing to the achievement of South Africa’s developmental goals. This is a hot potato discussion in South Africa currently. With elections coming up, it is perhaps one that the government and the ruling party do not want to dabble in too much as it can be very polarizing and will open the ANC up to internal discord as there is a very strong lobby within the party against moves to privatize SOEs.

It was also notable that the minister made clear that from henceforth, government would take a stricter approach to issuing government guarantees and bailouts to SOEs for operational purposes. Even a financially illiterate person knows that banks would never fund you to buy groceries against a growing debt burden. It thus makes no sense that government has been throwing out lifelines to SOEs who are struggling to improve their performance and depending on government’s largesse for their continued operations.

The issuing of policy guidelines by the Department of Communications to the Independent Communications Agency of South Africa (ICASA) for spectrum allocation is a positive step. It follows on statements by President Cyril Ramaphosa to make the price of communications more affordable if South Africa is to achieve its ambitions of becoming an active participant in the Fourth Industrial Revolution. It is also a wink to the upcoming general elections as the price of data has been something that South Africans, especially the young, have been very vocal about.

Similarly, a fully subsidized education and training for poor students at a cost of R111.2bn is an investment in South Africa’s future. Enabling 2.8 million poor South Africans to gain access to higher learning institutions is a move in the direction, even if this affects the fiscal framework negatively in the short- to medium term.

The announcement to freeze the salaries of Members of Parliament, Provincial Members of Parliament, as well as the executive is something of a gimmick, though it makes sense symbolically. However, the announcement may portend a new way of doing things which recognizes that state leaders cannot continue to receive preferential treatment whilst the general public is expected to make ends meet.

The review of South Africa’s allowances for civil servants stationed abroad is probably justified given the difficult fiscal conditions the country is grappling with. However, the government will need to manage the review carefully to ensure that ultimately, the best skilled people are attracted to serving in the diplomatic services of the country.

Unfortunately, money is a major incentive for accepting a posting to a place such as Mauritania, Burundi or Russia. The same care should be exercised in managing the public sector wage bill as government is already struggling to attract the most talented. Delivery against the important objectives that government has set requires good minds, and absolute personal commitment to serving the South African public. The best talented will not forsake the potential for high pay in the private sector for a place that has a bad reputation, and which has bad salaries. This is a fact!

Reducing the size of the public service is a good decision. The president and his cabinet will require strong backing from the entire ANC and alliance to make this happen. We know that South Africa’s labor unions are very vigilant against job losses. The mere whiff of restructuring at Eskom was enough to motivate the National Union of Metalworkers of South Africa (NUMSA) to picket Eskom, even in the absence of a definite pronouncement about laying off workers.

Similarly, government was forced to walk back any latent ambitions to downsize the South African Broadcasting Corporation (SABC), against the wishes of the board of directors, to placate the Communications Workers Union (CWU) which declared in no uncertain terms its displeasure at the plans of the corporation to reduce the workforce.

It is encouraging to hear that President Ramaphosa took an active, detailed interest in the preparation of the Budget. This probably speaks to the anxiety the president has about ensuring that the important programs that he announced during his State of the Nation Address are properly resourced. It also speaks the urgency with which the president views the matter of stabilizing South Africa’s economy.

 

  • Thembinkosi Gcoyi

Managing Director

Frontline Africa Advisory

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