Strong political and financial leadership is needed to steer the country’s economy towards positive growth this year, writes Raymond Parsons.
The combination of economic and political developments over the past 12 months in South Africa has generated particular interest in how the economy will perform this year. What are the factors to be taken into account as the year unfolds?
Last year, the bad news about the economy outweighed the good news. Consequently, South Africa’s GDP growth rate too often found itself in negative territory during the year.
More recently, the poor GDP growth of -0.6% in the third quarter of last year was followed in the fourth quarter by weak manufacturing and mining data, sagging retail turnovers, meagre new vehicle sales and continued low business confidence.
These trends suggest that South Africa will struggle to even reach the previously revised generally low forecast of 0.5% growth for last year – a growth rate that may yet fall even more.
With the present and future impact of Eskom’s load shedding last month also still to be fully assessed, economic growth forecasts are being reduced all around. Indeed, some economists even believe that the economy may well again have swung into a “technical recession” – two successive quarters of negative growth – in the second half of last year.
Growth this year is anyway most likely to be only about 1% – less than the 1.4% to 1.6% range expected earlier by the SA Reserve Bank and other economists. Growth at these low levels is widely recognised as completely inadequate if South Africa is to meet the overarching challenges of unemployment, poverty and inequality.
Another serious overhang between last year and this year is the vulnerable state of our public finances. Weak growth has hit tax revenues badly. But the medium-term budget policy statement (MTBPS) in October also frankly and realistically acknowledged that, unless more progress is made in reducing the cost drivers of government and state-owned enterprises (SOEs) such as Eskom and SAA, South Africa was in serious danger of falling into a “debt trap”.
Despite the remedies proposed by the MTBPS, they fell far short of preventing strongly escalating public debt trends up to 2022/23. The highly negative public debt outlook thus presents policymakers with tough choices this year, but some choices cannot be avoided or even postponed.
The fiscal situation requires germane and timely domestic policy action. Borrowing repetitively to finance consumption expenditure can only make South Africa poorer in the long run. The present fiscal laxity also saddles future generations with a burden.
The good news is that inflation has declined to well within the target range of 3% to 6%, with the onus now clearly on the SA Reserve Bank’s Monetary Policy Committee to explain why it cannot reduce interest rates at its meeting this month.
The rand strengthened considerably towards the end of the year, mainly thanks to global factors, with lower petrol prices now a possibility. South Africa had a successful foreign loan flotation in September. Export performance seems to have been sustained. Summer rains have also been positive for several regions, which is promising for agricultural output.
Growth forecasts for the world economy this year have also stabilised at about 3.3%, although downside risks still exist. Global financial markets finished last year on a high note as the immediate risks of a US-China trade conflict and uncertainties around Brexit receded.
Growth in sub-Saharan Africa is expected to average about 3.5% this year. Nevertheless, the domestic economic outlook for this year remains a tough and sombre one, with poor growth prospects.
Economic growth has virtually flatlined. The International Monetary Fund recently confirmed that the economy would experience “sluggish growth this year – below population growth for the sixth consecutive year”.
The contours of the economic and financial landscape in South Africa therefore dictate that a pivotal year lies ahead for the economy if economic recovery is to be fostered, more jobs created, public finances brought under control and business confidence lifted.
That said, there are at least five broad pillars on which better economic prospects might be built if there is a proactive approach:
1 A GREATER SENSE OF URGENCY IS REQUIRED IN OFFICIAL DECISION-MAKING, ESPECIALLY REGARDING ESKOM
Although several reform policies and new projects have been announced, a much greater sense of urgency is required in official decision-making. Pro-growth reforms must be expedited for South Africa to break out of its current “low growth trap”. Time is now of the essence. The possibility of more load shedding in particular continues to pose a serious threat to South Africa’s economic performance, especially once normal business activity resumes this month. Security of electricity supply remains an immediate priority.
2 SOUTH AFRICA CAN NO LONGER FOLLOW A ‘POLICY AS USUAL’ APPROACH
Both President Cyril Ramaphosa’s state of the nation address and the budget next month must demonstrate that the tough decisions needed to turn the economy around are being made, and will indeed be implemented. The president’s address must not only catalogue current “work in progress”, but must also convey a coherent sense of economic direction. The new Economic Advisory Council could play a useful consultative role here. However, there are no miracle recipes.
What is required for the budget, for example, is a return to the basic principles of fiscal discipline and sound budgetary planning. The dependency of SOEs on government funding and bailouts must be drastically curbed. The mounting level of public debt needs to be steadily wound down. Generally speaking, just as it can no longer be “business as usual” in South Africa, neither can it be “policy as usual”. Political factionalism within the governing ANC also needs to be successfully managed in the interests of consistent policy-making.
3 STRENGTHEN IMPLEMENTATION OF POLICIES AND PROJECTS
A lack of effective implementation must cease to be the Achilles heel of South Africa’s economic performance. A useful platform early this year, focusing on implementation, is the next Business Unity SA’s Business Economic Indaba. Hosted together with government later this month, its theme of Activating Actual Outcomes is pertinent. An intensive collaborative effort between the public and private sectors is also required to help overcome entrenched constraints on growth and reform. Neither government nor business and labour can tackle these challenges on their own.
4 CLEAR STEPS TO REDUCE POLICY UNCERTAINTY AND BOOST INVESTOR CONFIDENCE
To reduce policy uncertainty and boost investor confidence, a clear and consistent sense of direction ought to emerge this year around the drivers of economic growth. Treasury’s growth plan that was published in August urged that the fundamentals of inclusive growth, economic transformation and competitiveness should be strengthened now to reap tangible benefits later. The often repeated steps that would help to promote such economic recovery in South Africa include steadily implementing promised job-rich growth measures, credibly reorganising the country’s public finances, speedily stabilising and restructuring Eskom, urgently accelerating infrastructural projects and purposefully anchoring good labour relations.
5 NEED FOR STRONG POLITICAL LEADERSHIP AND SKILLFUL ECONOMIC CHAMPION
There also remains Moody’s Investors Service’s pending decision on the country’s investment rating hanging like the sword of Damocles over the economy and an even chance of South Africa descending into “junk” status this year. However, a narrow window of opportunity still exists to avert this “worst case” scenario.
Overall, this year remains a critical fork in the road towards South Africa’s challenging goal of a bigger, stronger and better economy, which will require strong political leadership and skilful economic champions to successfully manage it.
- Parsons is a professor at the North-West University’s School of Business and Governance, and a special policy adviser to Business Unity SA