Achieving the same rate of economic growth in the second half of this year as South Africa did in the first half of the year is looking increasingly unlikely.
Any hope of sustaining or accelerating the economic recovery in the latter half of the year were dealt a blow after a week of civil unrest, property damage and looting in KwaZulu-Natal and Gauteng. These events will undoubtedly set the recovery back, with early estimates indicating up to 1% being shaved off GDP growth.
There is no question that the recent events will result in a further loss of business confidence and deter future investments, further devastating an already fragile economy, something South Africa can ill-afford at this stage of its recovery.
Several economists have revised their GDP growth figures downwards in light of the disruption caused to the economy. In turn, this is bound to impact tax collection, with knock-on impacts on the fragile fiscus and the overall debt picture.
While the exact cost of the unrest has yet to be determined, estimations are that the final tally will be in the billions and will further exacerbate unemployment numbers. The unrest has severely dented investor confidence.
The Durban Chamber of Commerce and Industry has revealed that it is engaging with a number of companies – primarily foreign owned companies – who are considering divesting from KwaZulu-Natal and potentially even the country.
Government’s slow response to the protests and its failure to protect businesses, are arguably the biggest factors in the further decline of business and investor confidence. Foreign investors are attracted to investment destinations where the rule of law is respected and where there is policy certainty. Recent events will not help in this respect.
While the domestic economy staged a surprisingly good recovery in the first half of this year driven largely by the global demand for resources which led to high commodity prices, providing an unexpected boon to the local economy, the risks to the economy even prior to the recent unrest, remained significant.
How long, for example, will commodity prices hold up, particularly as China’s economic rebound appears to be slowing sooner than expected? This will have a knock-on effect on the global economy and could result in a moderation in commodity prices. Given that commodity prices have been a significant part of the domestic recovery story, South Africa has a significant dependency in this respect.
One of the biggest risks to South Africa’ economic recovery is the Delta variant which is currently driving the country’s third wave of Covid-19 infections. This surge and the four week long level 4 restrictions, which included a ban on the sale of alcohol and restrictions on travel in and out of Gauteng, has further dampened business and consumer confidence.
The alcohol, hospitality and travel industries, which are still struggling to recover from previous alcohol bans and the lockdown regulations, have been hard hit by the restrictions. It’s estimated that the first three alcohol bans cost the economy billions of rands in lost liquor sales, reduced tax revenue and investment, as well as significant job losses.
The slow – albeit improving – pace of the vaccines roll-out has done little to instil confidence that the pandemic will be under control any time soon. Although efforts had been made to increase the number of vaccines administered, the violent protests in KwaZulu-Natal and Gauteng resulted in many public and private vaccination centres closing during the unrest.
A positive consequence of the economic growth in the first half of the year was that it allowed the National Treasury to reduce the shortfall on the main budget. And to its credit, the Treasury used the opportunity to reduce debt issuance.
Key to stabilising government debt is halting the upward trajectory of the public sector wage bill. Public sector employees enjoy significantly higher salaries than their contemporaries in the private sector after several years of above-inflation salary increases without meaningful commensurate improvement in service delivery.
More than half of the trade unions representing public servants have accepted government’s offer of a 1.5% salary increase for an interim one-year wage deal and a monthly cash allowance. While the 1.5% increase was budgeted for, the cash allowance – which will cost R18 billion – was not and will require budget cuts in other areas.
From a budgetary perspective, another challenge is the cost of social welfare given high – and increasing – unemployment.
After the civil unrest, President Cyril Ramaphosa announced the reintroduction of the R350 Covid-19 relief grant. While there may be a very good case for implementing such a measure, where the money will come from without impacting fiscal consolidation plans remains unanswered.
Other risks facing the economy include the extent to which inflation will result in the Reserve Bank and other global banks increasing interest rates. Inflation is expected to increase in the latter half of the year and, contingent on this uptick, interest rate increases of one or two 25 basis points can also be expected. Expectations are that the Reserve Bank will be leaving the repo rate unchanged at this week’s monetary policy committee meeting.
The inflation trajectory in the US in the next few months will be one to watch given the extent to which international factors influence the local environment.
The recent strength of the rand – which was a benefit for exporters – should not be mistaken for a sign of the strength of the economy. As it has proved in the last week, the rand remains a volatile currency. Over the longer term, history has shown that countries with higher structural inflation than their trading partners tend to see depreciation, and this remains a risk to South Africa, in addition to the political and social risk the country continues to face.
In response to the fiscal cliff crisis that we face a significant focus of government has been expense containment. This may be a short-term solution to the problem if successful. However, the real challenge that South Africa needs to address is its longer-term trend of sub potential economic growth.
Generating meaningful economic growth is the only way that we will sustainably move away from a debt crisis, and it is the only way that we will be able to address the social issues that arise when an economy doesn’t grow.
Government’s lethargic implementation of a host of much-needed structural reforms, including removing barriers to business such as policy and regulatory uncertainty, creating a more business friendly and growth enabling environment, rooting out corruption and putting a halt to wasteful expenditure at a local government level, is core to the state in which we currently find ourselves.
Ultimately these issues will either enable, or as has been the case over the last two decades, inhibit economic growth. As was shown in the last two weeks, the social ramifications of the lack of economic growth have the potential to derail the South African project.
There is no question that unemployment, which has long been South Africa’s Achilles heel, will be further exacerbated by the twin shocks of the ongoing Covid-19 restrictions and the recent unrest which saw many businesses suffer long-term infrastructure damage.
Without enabling the country to achieve meaningful economic growth, South Africa will remain a powder keg. All indications are that recent events, coupled with the persistent challenges, will have ramifications in the months ahead, making it unlikely that the economy will enjoy the same economic growth it enjoyed in the first half of this year.
- Duvenage is the managing director of NFB Wealth Management