BMF Economy

Two years after President Cyril Ramaphosa first talked about a new dawn for South Africa, the economy has continued on the same path — the slow downward spiral that started during his predecessor Jacob Zuma’s second term. The five gimmicks of Ramaphosa’s new dawn have failed to deliver. The South African Chamber of Commerce and Industry business confidence index has slumped to its lowest level since April 1985. The Bureau for Economic Research business confidence index has dropped to a 20-year low with many business people saying that they have given up hope on future economic conditions.

But after five years of declining GDP per capita, the government still has no plan to get the country out of its worst post-apartheid economic crisis. Dark clouds are now hovering over the economy as slowing global trade, due to the trade war between the United States and China, a fiscal squeeze and the prospect of deeper austerity could result in the economy starting to unravel at a faster rate over the next 18 months. The sun is now setting on opportunities to change course. This could be a long dark night for the South African economy.

Since he became President in February 2018, Ramaphosa has announced five gimmicks to turn the economy around. To address the unemployment crisis, he announced the Youth Employment Scheme (YES), which planned to create 300 000 jobs a year. But YES had created only 14 000 jobs by July 2019. He also hosted a Jobs Summit, where social partners committed to creating 275 000 jobs a year. But everyone at the summit had a job. A report presented to the presidency painted a dismal picture, which showed that incompetent government departments had been the major reason most projects did not get off the ground. The number of unemployed South Africans has increased by one million people since 2018.

Ramaphosa also announced the appointment of envoys to hunt for new investments of R1.5-trillion over the next five years. He hosted a summit where companies made commitments to invest R300bn in the economy. However, many of the pledges referred to projects that had previously been announced.

For example, a $2.2-billion pledge by Anglo American referred to the construction of a diamond mine that was launched in 2013. In September 2018, Ramaphosa announced a stimulus and recovery plan where the government committed to establishing a R400-billion infrastructure fund to kick-start the economy. But in the 2019 budget, Treasury set aside only R1bn to the fund over the three years until 2022. Since 2018, there have been five out of six quarters of declining gross fixed capital formation. With deteriorating confidence levels, investment growth will remain weak or continue to contract during the first quarter of 2020, according to Nedbank economists Reezwana Seewad and Walter De Wet.

In August 2019, Treasury announced austerity measures of R326-billion over the next three years. If the measures are implemented, there could be three more years of declining GDP per capita between 2020 and 2022. The economy could tip into another recession.

A week after the announcement, Treasury released a controversial growth strategy for public discussion. The strategy had timid targets. It would have almost no impact on the economy until the fourth year, when most interventions would be implemented, according to Treasury’s own assessment. By the end of October 2019, the government was expected to lift R250-billion of Eskom debt to its own balance sheet. If one adds expected budget revenue shortfalls and additional allocations to Eskom, the debt to GDP ratio could soar to above 65 per cent of GDP, from 58 per cent at the end of June 2019, without a single new investment or job created in the economy.

The five gimmicks and the treasury strategy have one thing in common. They all focus on projects or microeconomic reforms and are silent on the macroeconomic policy tools that can be used to jump-start the economy. The job creation projects do not have the scale to confront the unemployment crisis.

Asghar Adelzadeh, chief economic modeller at ADRS Global, says advocating microeconomic reforms to overcome a macroeconomic crisis is a convoluted and inappropriate approach. It is like using brain surgery instruments to conduct heart surgery. He says the treasury strategy will only add 0.27 per cent a year to economic growth until 2030. But his modelling shows that the proposed austerity measures will cancel out these slim benefits.

Trade and Industry Policy Strategies economist Neva Makgetla says austerity during a slowdown can lead to falling revenues and rising debt. Although the deficit and public debt are nowhere near crisis levels, there must be innovative ways to provide a stimulus to demand, for example, leveraging the Unemployment Insurance Fund’s surplus of more than R100-billion. Makgetla says the treasury document generates a set of unco-ordinated, piecemeal proposals that will end up strengthening business without effectively promoting new activities or greater inclusivity.

The document’s list of 70 proposals is overwhelming. Such lengthy shopping lists, which we have seen many times before in documents such as the National Development Plan have invariably generated more disappointment than economic growth, she says.

Macroeconomic policy measures urgently needed

Looking ahead, the Reserve Bank’s latest monetary policy review says South Africa’s economy faces two large macroeconomic risks. “The first is global, a slowdown in trade growth that could precipitate a global recession. The second is domestic, a deteriorating fiscal situation linked to bailouts for state-owned enterprises.

“Both could worsen an already difficult domestic growth situation. The economy’s potential growth rate has slumped to around one per cent in the context of supply constraints (especially electricity shortages) and depressed business confidence. Demand has also weakened, in the face of higher taxes and slowing wage growth.” The only glimmer of hope, according to the bank, is that inflation outcomes have improved “which has given policymakers some space to reduce rates”. The bank says its policy stance “aims to provide support to a weak economy”.

Seewad and De Wet say the Reserve Bank could cut interest rates by 25 basis points in November or early 2020, if the country averts a Moody’s downgrade, which could lower financing costs further. “However, in the current environment of policy uncertainty, political instability and rising socioeconomic discontent, businesses are loath to kick-start investment even though financing costs have come down — political and socioeconomic risks remain far too great a hurdle to ignore in favour of lower financing costs.”

The scale of the economic crisis means that we cannot only use conventional policy tools to revive the economy. South Africa needs emergency macroeconomic policy measures to confront rising unemployment, poverty and inequality. There are only three ways to stimulate an economy in the short-term. A weaker exchange rate can boost export industries, but this strategy is not viable in a slowing global economy. Therefore, there should be emergency cuts in interest rates to support consumer spending and investment. With all major central banks cutting rates and using other policy tools to revive economic growth, there will never be better conditions for the Reserve Bank to do the same. Social partners must also develop innovative means of designing and financing a significant fiscal stimulus for the economy. A public-private agency could evaluate and award bids for infrastructure projects.