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South Africa’s economy in recession? President thinks otherwise!

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With GDP figures for the second quarter of 2018 shrinking by 0.7%, the South African economy slipped into recession. This followed a revised 2.6% contraction in the first quarter of 2018. The widely recognized indicator of recession is two (or more) consecutive quarters of negative growth (real GDP quarter-on-quarter).

Another R-word – “Ramaphoria” – has completely disappeared over the last few months, as the harsh realities of liberating the South African economy has tempered all early hopes of a quick turnaround post-Zuma.

But what is causing all the doom and gloom? Cyril Ramaphosa must be waking up in cold sweats, hearing the faint chuckle of his predecessor in the background, as the task of getting South Africa back on the straight and narrow grows ever more daunting.

The question then is: what must have put South Africa into a recession?

Weak business confidence

The economy can only really get going again if investors are willing to commit their money to expand businesses. Without that, the market is left to stagnate and that lack of ignition creates a Catch 22 situation.

Many investors won’t put their money into anything unless it shows improvement. But while that money is withheld, it becomes difficult for the economy to improve. FNB chief economist Mamello Matikinca told BusinessLive that a lack of confidence is seriously harming the situation:

“The sector continues to be hamstrung by weak business confidence and investment, which has seen the commercial vehicle segment -1.7% weaker year to date.”

Failing sectors

Agriculture production fell by 29.2% in the second quarter of 2018, following a 33.6% slump in the first quarter. This was largely driven by a decline in the production of field crops and horticultural products. Continued drought conditions in Western Cape and a severe hailstorm in Mpumalanga, resulting in extensive crop damage, also placed additional pressure on production in the second quarter.

The transport industry contracted by 4.9%, largely a result of decreased activity in both land and air transport. Industrial action within the industry, combined with a decline in freight transport, contributed to the slowdown.

The trade industry experienced its second consecutive quarter of negative growth, falling by 1.9%. Subdued sales in both motor and retail trade contributed to the decline. South African household consumption expenditure fell in the second quarter of 2018 compared with the first quarter of 2018, in line with the fall in retail trade sales. Households spent less on products such as transport, food, beverages and clothing.

Government activity decreased by 0.5%, largely as a result of falling employment numbers in the civil service.

Manufacturing was the third industry to record a second consecutive quarter of negative growth, following in the footsteps of agriculture and trade. Manufacturing activity fell by 0.3%, driven by a fall in the production of electrical machinery, transport equipment (including motor vehicles), and products within the furniture and ‘other’ manufacturing division.

Fighting corruption

It’s tough to blame President Cyril Ramaphosa for these trying times, however. As much as people are yelling at him to do something about soaring petrol prices, there are many factors out of his control. One of those is the fact that rooting corruption out of government can have negative economic consequences. No good deeds go unpunished, do they?

Kevin Lings of Stanlib explained to eNCA why busting those with their hands in the till can end up starving the economy of the cash injection it really needs to avoid a recession:

“As we start to clean up the amount of corruption and misspending in South Africa, you are effectively tightening up budgets, you are tightening up state-owned enterprises, you’re trying to put budgets in better position and that act of tightening actually results in less spending and less investment initially, so it’s possible that things get worse before they get better.”

You guessed it… land

Both Theresa May and Xi Jinping have given the thumbs up to land expropriation. But that hasn’t done much to settle international confidence. The thorny subject of land redistribution is still causing a bit of havoc with the rand, and it is currently stifling South Africa’s business landscape.

However, their endorsements have only come recently. As in, within the last few weeks as compared to figures that represented the months of April, May and June. This was at a time where the likes of Aussie Home Affairs Minister Peter Dutton were publicly denouncing any plans to expropriate land.

The international seal of approval will perhaps only be felt in Q3. But for now, South Africa waits with baited breath to see if it falls on the right side of the razor-thin margins, to stave off another recession.

Others

The currency crashed to below its level before Ramaphosa took power and the prospect of a potentially catastrophic downgrade by ratings agencies – that would make state borrowing more expensive – now looms.

Forecasts put real economic growth at less than 1% this year. Unemployment – already very high – is rising and inflation is hitting poor people’s budgets hard. “The economy is supposed to be his strong point … but there is just no confidence. The story of the new dawn is just no longer credible,” said Ralph Mathekga, a political analyst and author.

What is Cyril Ramaphosa thinking and doing?

The African National Congress (ANC) President, Cyril Ramaphosa, says South Africans should not be fearful that the economy is in a recession because this is not true. On this note, the President has been called upon to act swiftly to put the economy back on track. In his response to the wakeup call, he said he is confident that his economic plans will pull the country out of its first alleged recession in nine years.

In his earlier indication of instituting an economic-stimulus package, the President shared an outline of the stimulus package adopted by Cabinet to spark economic activity with the business and labor community.

Ramaphosa, who has vowed to revive the economy and clean up corruption, told the meeting he hoped to emulate the infrastructure fund of Indian Prime Minister Narendra Modi, who has mobilized billions from Indian banks to fund highways, airports and power plants.

Ramaphosa first mooted this stimulus package in July, before shock second-quarter GDP data indicated that the economy is in recession, shattering his stated target of 3% growth in 2018.

While no details were provided on the size of the proposed fund or the cost of the package, a statement issued by his office said that Ramaphosa “indicated that the stimulus package will reprioritize government spending, within the existing fiscal framework, towards activities that will stimulate economic activity”.

It said, “The package will include economic reforms … in mining, telecommunications, tourism and transport”.

“The meeting also discussed proposals to establish an infrastructure development initiative that draws in private sector funding and delivery expertise.

“The president welcomed the offer extended by business for the secondment of private sector professionals to government to improve implementation.”

However, several people close to the discussions said that it was not completely settled whether the plan would be deficit neutral and funded out of the existing envelope of government resources, or whether borrowing will be expanded to provide a bigger, more effective stimulus.

Finance Minister Nhlahla Nene — who addressed an “economic consultative forum” — spoke firmly of the package being deficit neutral, arguing that reprioritization of resources towards infrastructure spending would be sufficient to provide the necessary stimulus.

In recent years, the Treasury has been cutting infrastructure spending — mostly in order to reprioritize spending towards funding for higher education and to balance lower revenue collection.

Municipal infrastructure, housing and school building and renovation have all been negatively affected by the cuts, with R46.6bn slashed in 2017/2018; R48.3bn in 2018/ 2019; and R43.8bn in the budget for 2019/2020.

But other government officials argue that with such budget cuts already having been made, as well as additional spending demands such as the higher than budgeted for public sector wage settlement, it will not be possible to provide a large enough stimulus through reprioritizing spending.

A third government official said “it was early days … and things could still change”.

At issue is South Africa’s historically high debt levels, which at 55% of GDP are even higher than when the democratic government first took over management of the economy in 1994.

The Treasury has promised credit-ratings agencies and investors that it is on the path to fiscal consolidation and that it will consolidate gross debt at 56.2% by 2022, after which it is projected to begin falling.

The Treasury has also followed a strict expenditure ceiling since 2012 as part of the fiscal consolidation plan.

However, decisions on the shape and size of the stimulus are urgent. Ramaphosa is believed to want to announce the package soon.

Clarity of the fiscal framework must also be provided well before the medium-term budget policy statement in the last week of October.

 

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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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