Too little, too late

2018-09-20 14:47
President Cyril Ramaphosa.

President Cyril Ramaphosa.

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President Cyril Ramaphosa’s economic stimulus package to be announced next month will likely be too little, too late to prevent the recession from stretching on for a few more quarters.

Last week, he shared some parts of a series of reforms that he hopes will kick-start the economy.

Full details are expected to be announced on October 24, along with the Medium Term Budget Policy Review.

The economy has shrunk for two quarters and business confidence has slipped again, this after showing some life at the start of the year after Ramaphosa was made president.

Last year, we climbed out of a recession in the second quarter after only two consecutive quarters of negative economic growth.

Many commentators think the same thing will happen this year, and that business confidence will be restored when the stimulus package is announced. But there are aspects of this recession that suggest it will be much deeper than last year’s.

For a start, the property market decline has accelerated this year. And while some parts of the property market, such as high-end properties on the North Coast and in Cape Town, managed to grow through last year’s recession, the fall off of activity in these markets since then has been marked.

Another concern are the still-to-come rises in imported costs, notably fuel, due mainly to an almost 20% depreciation of the rand against the dollar this year.

Global investor uncertainties, such as the growing trade spat between China and the United States, have been a major driver of the rand’s depreciation, along with other emerging market currencies.

Rising costs should reflect in the inflation rate in the last few months of this year.

Another big worry when comparing this year’s recession with last year, is the investor uncertainty created by the ANC’s decision to change the Constitution to make it easier to seize land without compensation to redress historically skewed land ownership patterns.

Ramaphosa, and this week, deputy minister of Public Works Jeremy Cronin, have gone some way to address fears that there won’t be a wholesale confiscation of land.

Just this week, Cronin released details of a new expropriation bill which aims to “prevent arbitrary deprivation”.

The government says it will expropriate land that includes abandoned buildings, unutilised land, commercial property held unproductively and purely for speculative purposes, underutilised property owned by the state and land farmed by labour tenants with an absentee title holder.

But one person’s empty building may be another’s speculative investment — the devil will lie in the detail when the government tries to define properly these properties that it intends to give away.

Uncertainty in the investment community on this issue will likely linger until land-reform laws are properly formulated, and that may only happen after next year’s national election.

The ANC will almost certainly use land as a key rallying point for voters.

There are also other policy uncertainties that need clearing up in order to bolster investor confidence in the economy, notably the seemingly unending seven-year plod of the Mining Charter.

National Treasury has already halved Ramaphosa’s forecast of three percent GDP growth that he made at the start of this year and many economists now believe we may actually be lucky to achieve one percent growth.

The measures that Ramaphosa reportedly hinted at last week are supposed to “secure confidence in sectors affected by regulatory uncertainty” and cover mining, telecommunications, tourism and transport.

Ramaphosa’s economic stimulus package will, according to reports, “reprioritise government spending, within the existing fiscal framework, towards activities that will stimulate economic activity”.

We have heard this before. And it simply won’t be believed until the government starts to address the many structural inefficiencies in the public service.

It will be some time before struggling state-owned enterprises are restored to financial health.

Do you really think the ANC will adopt serious spending cuts in the government in an election year?

An infrastructure development initiative is also planned. New infrastructure needs to be considered carefully.

The 2010 soccer stadia certainly boosted the economy after the 2008 global recession, but they are now largely unused.

We need to build infrastructure that people will pay to use regularly. And it will need to be funded.

Another factor likely to crimp growth before the end of the year is a rise in interest rates.

This is becoming all the more probable due to the raising of rates in other emerging markets to make their markets more attractive for foreign investors.

So even if the government does announce some breakthrough initiatives that will make it easier for companies to do business, how long will it take for their owners to feel confident enough to dust off expansion plans?

Certainly not before the end of this year.

There are many economic hurdles that lie ahead.


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