- South Africa was already on shaky footing before the coronavirus outbreak.
- Government has been forced to band together to deal with an external threat, increasing its focus.
- The pandemic gives SA the opportunity to deal with Eskom's capacity issues, is forcing difficult decisions.
- In the coming months, government will have to implement long-overdue steps to liberalise the economy and promote growth and job creation.
SA is entering the serious phase of the Covid-19 pandemic, with deaths rising at a rapid 5% per day over the past week, whilst infections climb and test backlogs increase.
Western Cape government hospitals are reaching capacity limits, with field hospitals likely to come into play over coming weeks. The lockdown, despite having moved to Level 3, has already had a devastating impact on the SA economy, which will continue as social distancing, bans on certain activities and health & safety regulations are observed over coming months.
The mood of the country is understandably deflated, with livelihoods at risk, revenues under pressure, markets fragile and poverty concerns rising for the most vulnerable.
However, there may be a light at the end of the tunnel if we take the right steps over coming months and years, including a renewable energy Grand Plan for the country.
The SA economy was not in a healthy state before the pandemic, with GDP growth averaging only 1.4% in the prior decade and 0.8% in the preceding three years, and the National Treasury forecasting growth increasing to a disappointing 1.6% by only 2022.
Unemployment was at 29%, but using the more appropriate expanded definition, it was at 39%, with youth unemployment at 58%. Debt to GDP had risen from 35% in 2010 to 62% in 2019 with Moody’s forecasting a level of 91% by 2023. Foreign direct investment in 2019 was less than half the levels seen in 2008.
With the third ratings agency, Moody’s, downgrading the country to junk status, the economy is facing further pressure. However, the impact of junk status was always going to be moderated because almost 90% of government debt is rand denominated with locals holding more than 60%, and because local demand for bonds remains strong, with a record auction in March following the Moody’s downgrade.
Before the pandemic, the SA economy needed structural changes to boost trend growth, but this was arguably being hamstrung by power struggles within government and a lack of efficiency in the state apparatus. More than two years into the new administration, the country still awaits the review of the National Development Plan, which largely failed in delivering on its targets since 2013.
Although the Covid-19 pandemic and the associated fear and lockdown is having a huge impact on the SA economy, it is also creating opportunities for improved efficiency, bold decisions and steps to drive employment and inclusive economic growth.
A better-oiled machine
Government has been forced to work very hard to deal with an external threat, which has certainly increased its focus and efficiency. The infighting that remains, is not allowed to linger and is being promptly addressed, although it sometimes leads to decisions that are questionable. Such poor decisions and corruption are being aired, though, and are not allowed to fester. There is little doubt that government is becoming a better-oiled machine as the pandemic progresses, even if there are hiccoughs and we do not agree with all the decisions made.
There are also indications that the president’s status is growing within the ruling party with dissenting voices receiving much less airtime. Regardless of the possible missteps in a very challenging time, the pandemic is changing our government into a much more cohesive unit whose on-the-job training over recent months is preparing it for decisive and aggressive action going forward. This creates an opportunity for addressing long-overlooked areas to help promote inclusive economic growth, job creation, local production and exports.
Prior to the pandemic, steps were already underway to deal with dysfunctional state-owned enterprises like Eskom and SAA, with positive steps being taken in other areas such as the SA Revenue Service, the Public Investment Corporation and the Passenger Rail Agency of South Africa.
The current environment creates opportunities on the one hand to deal with Eskom’s capacity issues and on the other hand, is forcing difficult decisions to be made. This includes accelerated electricity procurement from private parties by Eskom, regulatory reforms for SA ports, the release of the broadband spectrum, improved third party access to freight rail and private partnerships for Denel as well as the SABC, all outlined in the 2020 Budget Review from National Treasury.
The SA economy has long been struggling with structural constraints caused by excessive regulation, an inefficient labour market, hurdles on high-growth industries like renewable energy, broadband bottlenecks, an overreliance on imported goods, tariff structure inefficiencies, an educational system not delivering the skills needed for the modern economy and an immigration system that favours low-skilled immigrants over the highly skilled individuals we need to boost growth and employment. The more efficient apparatus that government is developing during the pandemic, combined with historic high levels of public private co-operation and a stronger executive, creates the opportunity for aggressively dealing with these structural constraints.
Long overdue changes
Our government has the opportunity over the coming months to implement long overdue steps to liberalise the economy and promote economic growth and job creation. It is imperative that government spending, including on SEOs and municipalities, be reduced through increased efficiency, restructuring and salary sacrifices.
An improved service culture amongst the public sector is key to reducing the gridlock in the SA economy. The severe expected impact of Covid-19 on private sector income and wages needs to be moderated by a reduced tax burden, driven by public sector savings. Government spending should increasingly focus on economic growth and job-creation initiatives while the private sector should be empowered to do the same.
The SA economy needs to deal with the constraints on private industry of an inflexible labour market and onerous empowerment criteria. Strong economic growth should be encouraged through the deregulation of employment contracts between willing employers and employees, the relaxation of the national minimum wage requirements and more flexibility in industry-wide bargaining.
In the world after Covid-19, we cannot afford to hamstring our companies’ ability to compete internationally through stringent empowerment regulations like the Mining Charter. We need to replace crony capitalism with a meritocracy where the contributions of all South Africans are not just encouraged, but cherished, whether they are black or white. We cannot afford a zero-sum-game approach in the new world and we have to replace this with a growing, inclusive economy.
The private sector in SA needs to be further empowered through the increased ease of doing business and the growing access to necessary skills. We have to streamline our regulations and reduce the layers of red tape. We have to address our education system so that it can produce graduates who are ready to participate in a vibrant, modern economy.
The recent weakness in the rand presents an opportunity for structural changes in our economy to fall on fertile ground. While the weak rand will put pressure on imports and the balance of payments, it will also create and opportunity for import replacement through local production. This could give local manufacture a much-needed boost, which combined with reduced regulation and red tape, could encourage increased production, employment growth and an enhanced balance of payments position over time.
SA is in the favourable position to not be overly dependent on raw material imports, with the exception of oil, which is trading at historic low levels. A strengthening rand should be actively countered through monetary and fiscal action. It is a small price to pay by the wealthy if it occurs in conjunction with a more conducive operating environment and a greater appreciation for the important role they have to play to generate inclusive growth.
A particular area of local manufacture, which should be aggressively promoted and supported, is in the area of renewable energy. The country already has a flourishing independent power producer (IPP) sector with 6.5GW having been procured and 4GW online by the end of 2019 and almost 50 000 jobs created according to the IPP Quarterly Report. A further 32GW is planned for addition by 2030.
Over the past five years, global renewable energy production has doubled to 1 200 GW and is on the way to trebling again by 2030, according to a recent IRENA report. However, if global efforts to fight climate change accelerate as many are agitating for, this industry could be 5 times larger at almost 6 000 GW by 2030 and a massive 15 000 GW by 2050, generating over 60% of total energy requirements.
I would argue that SA’s renewable energy plans are extremely conservative in the context of global growth potential and too focused on meeting local demand needs. At less than 1% of conservative global forecasts by 2030, there has to be significant upside.
The SA IPP sector should expand its focus from simply meeting local needs, to innovation, manufacture and export to meet high growth in regional and global demand. The time is ripe for a renewables Grand Plan for SA. The potential hurdles for such an ambitious strategy are regulatory, capital and skills.
I believe that an invigorated and focused SA government, who is willing to take decisive action to drive inclusive growth in the wake of the pandemic, could meaningfully reduce regulatory hurdles to a massive renewables strategy for the country, whilst introducing strong incentives including tax breaks and funding.
Considering the recent downgrade of SA debt to junk status, there may be concerns around the availability of foreign portfolio flows to fund a renewables Grand Plan. However, up to now, the majority of SA IPP projects have been locally funded and 80% of the planned roll-out will be SA funded. SA corporates and investors are not short of capital to invest, but have rather struggled to find attractive investments to commit their money to.
As at the end of 2019, SA non-bank financial institutions had almost R10 trillion in assets with R3.1 trillion in fixed interest investments and R600 billion in cash, of which more than R300 billion was lying in money market unit trusts in search of yield. With the 2.5% decline in interest rates so far this year, there is a significant incentive to find yield elsewhere. We believe that a renewables Grand Plan strategy, strongly supported by government and enabled through eased regulation as well as tax and other incentives, will not struggle to find local capital backers. As this plan gains traction, international flows will follow.
For the Grand Plan to succeed, SA would have to invest much in local innovation and import replacement. We would need to be at the forefront of global developments and we would need to own as much of the supply chain as possible.
The major hurdle for this to occur would be a shortage of local skills. This should be addressed in the short-term by reallocating and importing scientific and engineering skills. Over the medium- to long-term we must address this through a focused initiative from secondary and tertiary education to on-the-job training.
SA has the opportunity to exit the Covid-19 pandemic with a renewed focus, a liberalised economy, the aggressive promotion of local manufacture and job creation as well as a Grand Plan to become a significant global player in the renewable energy market.
We have the opportunity to unite the country in a common goal, which will drive unemployment down, boost inclusive economic growth and make SA a significant player in largest growth industry for decades to come.
This is an easy decision, in my opinion, with limited downside, but it will need a grand vision and bold decisions. The Covid-19 crisis presents us with the opportunity to become a great country and a world leader in avoiding the climate crisis that faces the world.