Even though South Africa has got off to a positive start this year, it is too early to tell that the country is on a new growth trajectory, said Reserve Bank Governor Lesetja Kganyago.
He delivered an address to the SwissCham Southern Africa General Assembly in Zurich on Tuesday, where he spoke on the outlook for the South African economy as well as domestic and global risks to it.
“It has been a very positive start, and no doubt an important turning point for the country. But it is too early to declare that we are on a new growth trajectory,” he said.
Economic growth forecasts have been revised upwards, and he referred to Reuters’ latest consensus forecast of 1.6% for 2018 and 1.9% for 2019. The Reserve Bank revised growth upwards to 1.7% in March.
“The improved outlook is based, together with upward revisions to past economic data, on the strong improvement in confidence.”
According to research by the Reserve Bank, low levels of confidence in the past few years essentially shaved off one percentage point of growth in both 2015 and 2016, he explained. He also referred to Treasury’s estimate that the return in confidence could add 0.4 of a percentage point to potential output.
“But a cyclical recovery based on a rebound in confidence, however welcome, is not enough. Raising potential output significantly and in a sustained way requires not just a commitment to structural reforms, but actual implementation.
“This should go hand in hand with increased fixed capital formation,” he said.
Lower investment levels
The weak trend in gross fixed capital formation by the private sector has also been one of the main reasons behind lower growth.
After two years of contractions, private sector investment recently picked up. But again, Kganyago warned it is too early to tell if the increase is the beginning of a positive trend.
Kganyago also pointed out that government was introducing structural reforms, some particularly are “low hanging fruit” and if implemented quickly could yield high returns.
“According to the National Treasury, these reforms could increase potential output by two to three percentage points from the current estimate of 1.5%.”
These reforms include those in telecommunications, lowering barriers to entry, reforms in the transport sector and prioritising labour-intensive sectors such as agriculture and tourism, he said.
He added that certain areas of private-sector investment were held back due to a lack of policy certainty, particularly in the mining sector.
“Regulatory and policy uncertainty, coupled with disagreement around the new Mining Charter, has undermined one of the key sectors in the South African economy. According to the Chamber of Mines, the resolution of these issues could unlock a significant amount of investment capital,” he said.
Governance at SOEs
Kganyago shared that government was addressing problems at state-owned enterprises which resulted in costs borne by the economy and consumers. “Governance issues are also of great concern to foreign investors, particularly those who already hold, or are considering buying, bonds of these corporations.
“The fragile state of Eskom’s finances has potential fiscal consequences. All these issues need to be sorted out and have been identified as priorities.”
He mentioned that changes were being introduced at boards of SOEs and that more work needs to be done at operational level to improve efficiencies and reduce costs.
“These corporations cannot simply rely on unsustainable tariff increases, as in the case of Eskom, or on further government bailouts, as in the case of South African Airways.”
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