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Growth vs stagnation: Where will the president take us?

2019-05-26 14:47

SA has struggled to emerge from a period of economic stagnation and Ramaphosa faces many challenges, but, if he succeeds, a better future for all is possible

When the global financial crisis hit in 2008, South Africa was sitting on reasonably strong macroeconomic fundamentals, including having a healthy fiscal position, as well as solid levels of business and consumer sentiment.

The economy had grown by an average of 4.2% between 1999 and 2008, while the headline rate of unemployment had fallen to 22% under the presidency of Thabo Mbeki.

The country managed to ride out the global storm thanks to its sound fiscal management and coherent policy formulation.

However, South Africa has since struggled to emerge from a period of economic stagnation.

During the Jacob Zuma administration, between 2009 and 2017, growth plummeted to an average of 1.8%, similar to population growth, and the headline rate of unemployment climbed to 27%.

Low growth prospects, stark inequality, a mismanagement of resources and a degradation of institutional credibility damaged business confidence, which languished below neutral for much of this period.

The regulatory environment for starting a business also worsened during Zuma’s tenure.

South Africa dropped from 34th place out of 181 countries on the World Bank’s Ease of Doing Business ranking in 2009 to 82nd out of 192 countries last year, leaving the country trailing its African peers, including Mauritius (20), Rwanda (29) and Kenya (61).

Similarly, perceptions of corruption according to Transparency International deteriorated for the country, with South Africa dropping from 55th position (out of 180 countries) to 73rd in the same period.

Upon entering office last year, President Cyril Ramaphosa inherited a multifaceted socioeconomic crisis.

Cyril Ramaphosa Picture: Diaan Viviers

Dysfunctional municipalities, incompetent leadership at key state-owned enterprises and criminal allegations against members in the ANC executive complicated the task of addressing the enormous challenges facing the country, more so given the country’s limited fiscal room to manoeuvre.

Nevertheless, citizens shared a new optimism for an economic revival when Ramaphosa took office.

For the first time since former president Nelson Mandela in 1994, the residing president polled at a more favourable rating than his party.

In Momentum Investments’ view, the 57.5% majority win by the ANC in this month’s national elections should be significant enough to promote reform, but low enough to prevent complacency.

Ramaphosa is likely to implement some economic, political and regulatory reforms to rebuild a fragile foundation and restore state capacity over the next five years.

Read: Dear President Ramaphosa, this is what needs to be done

The magnitude of the reform agenda will determine how high and sustainable South Africa’s growth trajectory will be in the coming years, and whether the broader population will be better off.

Against the backdrop of moderate global growth and reduced policy uncertainty in key industries in South Africa, Momentum Investments expects the economy to grow at an average of 2% in the next five years, reaching above 3% in the thereafter outer years.

While positive political momentum should have a favourable influence on confidence, populist political posturing and factional tension within the governing party could be stumbling blocks for the implementation of more contentious policy reforms, such as national health insurance and land expropriation without compensation.

Under this base case scenario, government will most likely continue dismantling patronage networks built under the previous administration.

Similarly, institutional credibility will most likely be restored, while financial and operational inefficiencies at state-owned enterprises are expected to be addressed.

These measures are anticipated to drive a recovery in the investment climate over time, stemming the depreciation in the local currency caused by poor relative growth differentials, structurally high twin deficits and perceived policy risk.

Reconstructing an inclusive economy that addresses the country’s social ills will take time and, as such, the unemployment rate could stay elevated as growth is initially insufficient to meet the needs of a growing labour market.

Reconstructing an inclusive economy that addresses the country’s social ills will take time and, as such, the unemployment rate could stay elevated as growth is initially insufficient to meet the needs of a growing labour market.

Fiscal sustainability will most likely be achieved in the medium term, but in Momentum Investments’ view, contingent liability stress will probably remain a threat to the sovereign ratings outlook.

In the best-case scenario, average growth over the next five years will most likely recover to its longer-term rate of 3.25%.

A revival in consumer and business sentiment should lead to higher consumption and investment, while an increase in competitiveness and an improvement in the ease of doing business should buoy economic activity.

Moreover, external investment inflows would most likely improve on a significant reduction in political noise and a more stable economic environment.

Higher growth and healthier tax revenues should lead to an improvement in the country’s fiscal and debt ratios, which could gradually guide South Africa’s sovereign rating back into investment grade among all the major ratings agencies.

Under the best-case scenario, government is expected to accelerate its reform efforts in the product and labour markets, and collaborative efforts by government and the private sector would begin to resolve the country’s challenges.

Read: Distinguishing economic policy from economic polemics


At this level of growth, the country is better enabled to dent unemployment and make inroads into poverty and inequality.

Meanwhile, in the worst-case scenario, against a weaker global economic setting, heightened factionalism causes the president to shelve his reform plans and a faster implementation of economic reform is hampered.

Consequently, an inconclusive policy environment persists, and internal business sentiment and external investor confidence remain in the doldrums. Workstreams between the private sector and government reach a stalemate and growth in investment continues to lag.

Growth paralysis sets in and economic activity fails to grow meaningfully above 1% on average in the next five years, exacerbating an already high level of unemployment and rampant poverty.

Building a more prosperous future for South Africa and ensuring an improvement in living standards for all its citizens will require Ramaphosa to effect political and economic stability

The fiscal burden would increase under this scenario as fruitless and wasteful expenditure continues, and revenue collection comes under pressure.

Additional bailouts to failing state-owned enterprises, with ongoing operational and financial inefficiencies, would lead to a worrying rise in the level of government debt, placing downward pressure on the country’s sovereign rating.

With institutional strength remaining questionable and little progress on the policy and governance front, South Africa’s attractiveness as an investment destination fails to improve, giving rise to external risks.

Ultimately, in Momentum Investments’ opinion, building a more prosperous future for South Africa and ensuring an improvement in living standards for all its citizens will require Ramaphosa to effect political and economic stability, a strengthening of state institutions and law enforcement agencies, an alignment of priorities, an effective social compact and a commitment to implement initiatives that promote long-term inclusive growth.

While the challenge is great, a better future for South Africa’s people depends on it.

  • Packirisamy is an economist at MMI Investments and Savings
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December 8 2019