May 7, 2019
Kevin Lings, STANLIB chief economist
Over the past five years SA has achieved an average annual growth rate of only 1.1%, which is well below the level of growth required to generate a meaningful increase in employment. The growth rate has stalled in the first five months of 2019, hurt by renewed electricity outages that have further undermined both consumer and business confidence.
The South African economy is facing a number of key challenges including continued policy uncertainty, ongoing fiscal slippage aggravated by the deterioration in the major State-owned Enterprises (SOEs), the risk of a further credit rating downgrade by Moody’s, large price hikes in water, electricity and fuel, a sluggish export performance that has been aggravated by the slowdown in global trade, and a rise in social unrest linked to the proximity of the National Election.
Unsurprisingly, the IMF lowered SA’s 2019 growth forecast to 1.2% from 1.4% in January 2019, and reduced its 2020 forecast by 0.2 percentage points to 1.5%. These forecasts are similar to those provided recently by the South African Reserve Bank.
In revising South Africa’s GDP growth forecast lower, the IMF highlighted the negative impact of ongoing policy uncertainty and the damaging effect of “structural bottlenecks”, which include increased electricity constraints, on fixed investment and productivity. The IMF repeated its previous suggestion that in SA “structural reforms, particularly to product and labour markets, would foster an environment conducive to expanding private investment, job creation, and productivity growth”.
There is a clear intention on the part of government to lift growth and employment over the next few years. However, a sustained uplift in the growth rate is highly dependent on President Ramaphosa having the political will, support within his own political party and capacity within key institutions to more actively implement his New Economic Stimulus and Recovery Plan.
This includes the restructuring of Eskom, and an undertaking to resolve the financial difficulties in other key SOEs, efforts to curtail the size of government including the number of government departments and cabinet positions, progress in prosecuting key government officials involved in corruption, clarity on the mechanics of land redistribution, and the greater involvement of the private sector in improving SA’s infrastructure capacity. There appears to be an acceptance that the survival of Eskom, and the provision of a reliable energy source for the development of the country, will require additional private sector involvement.
Closing the gap between SA’s current economic growth rate of less than 1% and a modest target of 3%, on a sustained basis, is going to require a significantly larger political effort than is currently evident, including the co-ordination of economic policy across key government departments. In that regard it is encouraging that the Minister of Finance did not deliver an outright “populist” National Budget in February 2019. Instead he made bold statements about the need to reform public enterprises, highlighted the importance of reducing salary costs within government and stressed the importance of improving revenue collection.
It is also critical that the government maintains its investment grade credit rating from Moody’s Investor Services (Moody’s). Moody’s last updated its credit opinion on SA in early April 2019, affirming the view that while economic growth will remain slow and fiscal strength will continue weakening, it expects the credit profile will remain in line with those of other Baa3-rated sovereigns. However, it warned that SA’s credit rating would likely be downgraded if the credit risks currently associated with the major SOEs continued to deteriorate, or if there was a significant further weakening of the South African economy.
There is significant weight of expectation that once the noise surrounding the National Election has dissipated, government will focus more fully on lifting the country’s growth rate and encouraging private sector fixed investment and job creation. This is obviously easier said than done given the institutional decay that has become apparent in recent years as well as the sustained low level of confidence in key parts of the private sector. Nevertheless, the implementation of a few key policy initiatives by the newly-elected government, coupled with the inherent strength of the South African corporate sector and the resilience of the household sector should result in the economy gaining some momentum into 2020.