South AfricaSouth Africa’s economy in recession? President thinks otherwise! Published 11 months agoon October 3, 2018By Vaultz Publisher Share Tweet 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 confidenceThe 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 sectorsAgriculture 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 corruptionIt’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… landBoth 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.OthersThe 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. Related Topics: Up NextThe key economic and political risk events to haunt South Africa’s economy in 2019 Don't MissWeak Economic Growth Knocks ‘Ramaphoria Continue Reading Advertisement You may like Click to comment South AfricaEskom Crisis and Rising Unemployment– Woes of the South African Economy Published 5 days agoon August 15, 2019By Vaultz Publisher South Africa’s outlook has been dealt several heavy blows in recent times following Eskom’s financial results, and the latest unemployment data, which has raised the question: where to from here? South Africa’s unemployment rate climbed substantially in Q2 2019, StatsSA said on Tuesday, 30th July 2019.The Quarterly Labor Force Survey for Q2 2019 showed that the unemployment rate increased by 1.4 percentage points from 27.6% in the first quarter of 2019 to 29% in the second quarter of 2019.Eskom, meanwhile, reported a record loss for the year ended March 2019, of R20.7 billion, following years of corruption that has seen the power utility’s debt spiral out of control, fueling rumors that international ratings agency Moody’s could downgrade South Africa’s sovereign debt to junk status.Analysts had hoped for a turnaround in fortunes following the election of president Cyril Ramaphosa, and post general elections in May. However, the country has been dealt one bloody blow after another, raising serious questions about its turnaround prospects and timeframe, which seems to get further away as both global and local financial institutions narrow economic growth. Dawie-Roodt-Chief-Economist-at-Efficient-GroupThe reason why the state’s finances finds itself in such a death-defying spiral, according to chief economist at Efficient Group, Dawie Roodt, is because, especially since 2009, state spending has increased relentlessly at a time when tax collections collapsed– mostly because of a faltering economy.“At this rate of debt increase, it is very clear things will turn out very unhappy, very soon,” he said.Roodt said “note that to fix the problem of collapsing fiscal accounts, a combination of three things needs to happen to stabilise the debt to GDP ratio.“The first thing is that the economy should preferably start growing at a rate of 6%, at which rate the debt to GDP ratio will stabilise.“Unfortunately, the ruling elite seems to be hell-bent on doing even more damage to the economy with all sorts of silly socialist ideas, like the suggested creation of yet another state bank, a new mandate for the SARB and the unaffordable NHI. Because of this, economic growth, believe me, will not save us from this fiscal cliff,” he said.A second option is to increase taxes by the equivalent of 5% of GDP (current market price), which is approximately R250 billion. For example, VAT needs to increase by more than 11 percentage points to get this kind of money, or personal income taxes need to increase on average by nearly 10 percentage points.This option, Roodt stressed, is irrelevant as a tax increase of this magnitude would have a huge adverse effect on growth, while overburdened taxpayers would likely revolt.“Preferably, and the only realistic option left, is to cut state spending with a similar amount: R250 billion,” Roodt said.“Percentage wise that is a real reduction in state spending of approximately 15%, or 20% in nominal terms. Now, show me the politician with the clackers to go and give COSATU the good news. But even if we could implement such austerity measures, the initial impact on the economy will be hugely negative – damned if you do, damned if you don’t,” the economist said.Roodt also delivered a scathing assessment of president Ramaphosa.“Judging from president Ramaphosa’s actions so far, he must either be weak, doesn’t appreciate the danger in which the South African economy is, or he simply doesn’t care,” Roodt said.“I think we have a weak president that simply doesn’t have the political capital to implement unpopular structural changes. All that is left for him to do is to use (gutted) institutions, like the NPA, to do the heavy lifting for him. He is playing the “long-game”, but this economy doesn’t have a long time.“Even if we can somehow wave a magic wand and get rid of all the corruption and incompetence in the state and SOEs overnight, the perilous condition of the state’s finances will need an extraordinary attempt to save us from further economic collapse,” Roodt said.Roodt said that none of his three scenarios will likely prevent the inevitable: “Debt will continue to balloon, the economy will falter, poverty and unemployment will keep going up and those that are responsible for all the troubles will keep on blaming “the others” for their absurdities”.“By then the only remaining alternative will be to inflate your debt away. But for that to happen you need to control the SARB – and with Lesetja Kganyago at the helm, that is not going to be easy. But be assured, as we sink further into this debt chaos the pressure on the SARB will become relentless and eventually also the SARB will buckle under the pressure. And then, inflation.”“What we must understand,” Roodt said, “is that no structural adjustment, no new dawn, no fresh start can be taken seriously unless it includes an admittance that there are just too many trying to live off too few. Many tens of thousands of civil ‘servants’, including those at SOEs, are simply not needed. They must go.”Economic growth– from bad to worse.Early second-quarter indicators signal some respite following a sharper-than-expected contraction in Q1 due to rolling power outages. The retail sector picked up in April; car sales, on average, bounced back from the first quarter in April–May; while manufacturing activity grew at a faster pace, on average, in the same two months. Overall growth prospects remain bleak, however, with uncertainty over the restructuring of Eskom, the heavily indebted state-owned power utility, weighing on economic sentiment. Following slight upturns in April, the manufacturing PMI swung back into negative territory in May–June, and business confidence faltered again. The government is considering other measures to aid Eskom in addition to the ZAR 230 billion pledged, while minimizing the risk to public finances and credit ratings. Options on the table include swapping the firm’s sizeable debt for sovereign bonds or using a special purpose vehicle.The International Monetary Fund becomes the latest key institution to slash its growth forecast for Africa’s most-industrialized economy, which may have fallen into its second recession in as many years. It now expects the economy to expand by 0.7% in 2019, half of what it estimated in in the beginning of the year, and similar to forecasts by the South African Reserve Bank and Bloomberg Economics.The economy shrank the most in a decade in the first quarter of this year as the nation suffered the worst power outages since 2008.The National Treasury, which forecast growth of 1.5% in the February budget, is expected to lower its prediction in the October mid-term budget. While the World Bank’s 1.1% estimate seems to be an outlier, it was published as part of its mid-year Global Economic Prospects outlook on the same day that Statistics South Africa released data showing a much bigger-than-expected contraction for the three months through March. South Africa is stuck in its longest downward business cycle since 1945, data from the central bank showed in June.In all, growth is seen decelerating this year as persistent power outages continue to weigh on economic sentiment and curb investment and private spending. That said, a pickup in export growth should cushion the slowdown. Downside risks to the outlook stem from policy uncertainty surrounding Eskom’s debt restructuring and President Cyril Ramaphosa’s reform agenda. Continue Reading Advertisement LatestPopular LN | Business5 days agoKasapreko Alomo, King of Bitters @ 20 The Focus5 days agoGHANA’S DEBT CRISIS– The Rising Concerns Economy5 days agoRevenue Blues for the Government Banking5 days agoTransforming Banking Operations to Suit New Age Customers Insurance5 days agoClimbing the Power Curve: Winning in the Insurance Market Real Estate5 days agoCosts Unknown to Home Buyers in Purchasing New Homes Investor's World5 days agoInvesting– No Longer a Luxury! 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