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South African Economy on the path of growth

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The South African economy expanded an annualized 2.5 percent on quarter in the three months to June of 2017, ending two quarters of contraction and beating market expectations of a 2.1 percent rise. It is the highest growth rate in a year with agriculture, forestry and fishing making the largest upward contribution, namely field crops and horticultural products.

Agriculture, forestry and fishing jumped 33.6 percent, higher than a 23.1 percent increase in Q1. Additional upward contributions came from finance, real estate and business services (2.5 percent, recovering from a 1.2 percent decline in Q1); mining and quarrying (3.9 percent compared to 13.1 percent in Q1), namely coal, gold, manganese ore and iron ore and other’ mining and quarrying including diamonds; manufacturing (1.5 percent to -3.7 percent in Q1), mainly food and beverages, motor vehicles, parts and accessories and other transport equipment; electricity, gas and water supply (8.8 percent compared to -4.8 percent); transport and communication (2.2 percent compared to -1.6 percent in Q1); trade (0.6 percent compared to -5.9 percent in Q1) and personal services (1.1 percent compared to -0.1 percent in Q1).

In contrast, general government services decreased by 0.6 percent (-0.7 percent in Q1) and construction went down 0.5 percent (-0.8 percent in Q1), with falls seen in both residential and non-residential buildings.
Year-on-year, the economy advanced 1.1 percent, above 1 percent in the previous quarter and the highest annual growth rate in two years. Considering the first half of 2017, the economy advanced 1.1 percent.

The Growth Activators

Agriculture

Agriculture continued to show strong recovery from South Africa’s recent drought, increasing production by 33.6%. The rise in the second quarter was mostly driven by a rise in the production of field crops, in particular maize and wheat, as well as increased production of horticulture products such as vegetables.

South Africa is on track for record-breaking maize crops if production continues at estimated levels, according to figures from the Crop Estimates Committee (CEC). The CEC expects the country to produce 16.4 million tonnes of commercial maize in 2017, more than double the last year’s harvest, and higher than the current record of 14.7 million tonnes produced in 1981.

The bumper crop has already provided some relief for cash-strapped South African households. Higher stocks of maize and wheat have begun to dampen prices, with bread and cereal prices falling month-on-month for six consecutive months, according Stats SA’s most recent consumer price figures (February to July).

The Finance Industry

Reserve Bank of South Africa

The finance industry was the second largest contributor to GDP growth in the second quarter of 2017, growing by 2.5% on the back of higher activity in financial intermediation and auxiliary activities.

The Mining Industry

The 1970s are best remembered for disco, bell-bottoms, and the mesmerising lava lamp. It was also the decade that saw South African mining forge ahead in its influence on the economy and employment. How has the economy in general and mining in particular, shifted since then?

Mining’s contribution to total economic production climbed in the 1970s to peak at 21% in 1980. Contributing to the upward surge in 1980 was a relatively high gold price. In other words, for every R100 that the South African economy produced that year, R21 was due to mining. In 1987, employment in the industry peaked at just over 760,000 individuals.

Of course, mining is not the only industry that contributes to the South African economy. A different animal was the South African economy in 1980 compared with the economy that was in 2016, as shown in the graphic below.

Manufacturing was the largest industry in 1980, falling to fourth place as of 2016.

Mining was the second most influential industry in 1980, with its 21% contribution to the gross domestic product (GDP). In 2016, the industry contributed 8%.

Agriculture also slipped in ranking to fall from seventh to tenth place, contributing 2% to the GDP in 2016.

As the primary and secondary sectors of the economy waned, the tertiary industries took centre stage. The most notable climber was finance, rising from fourth place in 1980 to become the largest industry in 2016. Government was not far behind, rising in the ranks to take second spot.

Even though mining has lost some of its shine, it is still an important employer. The size of the mining workforce in 2015 was estimated at 490 146 individuals, according to Stats SA’s recent census of mining report. The PGM (platinum group metals) industry has the largest workforce, followed by gold and coal.

Coming into the second quarter of the year 2017, the mining industry has expanded by 3.9% on the back of increased production of coal, gold and ‘other’ metal ores such as iron ore and manganese ore. This is the second consecutive quarter of growth for mining, although production was more subdued than the 13.1% growth recorded for the first quarter of 2017.

Other notable features of the second quarter include positive growth in manufacturing (1.5%) after three consecutive quarters of decline and a strong rebound in electricity, gas and water (8.8%).

The 2.5% rise in GDP brings to an end South Africa’s second recession since 1994. However, there are a few statistical points to note. Firstly, quarterly growth rates can be quite volatile. Secondly, the headline figure of 2.5% is the growth rate after annualisation, in other words what the annual growth rate would be if the quarterly rate were to be repeated for four consecutive quarters. Thirdly, if we compare the first half of 2017 with the first half of 2016, the growth rate was 1.1%.

Although the headline figure is the most publicised, the key lesson is that it should not be used in isolation. There are other GDP indicators that complement the headline figure, and taken together they provide a more comprehensive picture of economic performance.

So even though 2.5% might seem like an impressive recovery, longer-term indicators show subdued growth. As a nation, the goal of achieving and sustaining higher rates of economic growth and development remains just as important as ever.

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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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