The South African economy is unlikely to expand beyond two percent in the next three years. The IMF expects South African economy to grow to only 1% in 2021, a downwardly revised figure since the release of their last World Economic Outlook in October 2019.
Not only are these forecasts on the performance of the South African economy sobering, they confirm the deep economic rut that the economy is in. Discussions on how to grow the economy have been interrogated ad nauseam by all and sundry, with the latest attempt being the National Treasury’s document, which caused a stir instead of piquing interest.
But the reality is that the current state of the economy is unsustainable. The can has been kicked down the road for some years, but now we are experiencing a precipitous decline. Real GDP per capita has declined, productivity growth is slowing, income growth has stalled, the unemployment rate is 29.1% - the highest it’s ever been since the employment estimates where recorded using the Quarterly Labour Force Survey, the inequality gap has widened and less than 50% of leaners matriculate, to name some of the immediate problems.
We expect better economic outcomes and yet we are not willing to put in the work to change the treacherous course the economy is headed.
For starters, we continue to delay the release of spectrum, which, if released, will be a game changer. Spectrum will bring about efficiencies in the ICT sector and reduce the cost of data. Cheaper data means more rands in the consumers’ pockets, which can be go towards savings or consumption.
Cheaper data will also help businesses, especially new entrepreneurs, allowing them to gain a market without having to move to an economic hub. Transport costs are one of the primary reasons why jobseekers are unable to look for jobs, cheaper data will allow jobseekers to look for jobs and participate in online interviews without leaving the house.
Importantly, cheaper data translates into a more informed society who will enjoy greater choices and access to real-time data, which will encourage greater economic participation. The release of spectrum will have an immediate positive impact on the economy of South Africa.
On the financial side, South Africa currently has a fiscal credibility problem and its fiscal policy has become unclear. The National Treasury’s estimations of debt reduction, fiscal consolidation and the stabilisation of public finances, particularly in the outer years, have not been committed to. In an environment with a great deal of uncertainty, government must build fiscal credibility by demonstrating prudent fiscal policy decisions.
SA is faced with higher expected fiscal deficits, a larger fiscal burden, high pressure on spending, rising interest rate costs and an increase in contingent liabilities related to SOEs, particularly Eskom.
This presents a fiscal credibility conundrum: How can SA reinstate its fiscal credibility while simultaneously restoring economic growth? Stringent fiscal rules need to be put in place to ensure that the National Treasury sticks to its funding guidance and anything that falls outside the fiscal rules, should not be accommodated. It may be argued that in times of economic hardship, government should be able to respond by allocating emergency funding, however, the government has stepped in and its success rate has been insignificant. Even when government spends, the efficiency of that spending is questionable, and it has not helped grow the economy.
An issue that Treasury is currently grappling with is the increase in contingent liabilities, which represents the exposure of national government to guarantees and other obligations that could change into fiscal obligations. Government contingent liabilities are forecast to top R1trn by 2022. The current value of contingent liabilities is about R880bn. In the current financial year, SOCs account for most of the exposure to guarantees at 70%, followed by IPPs at 28%.
The move to put in place new board members with integrity was a step in the right direction, but government needs to set out a plan for the more than 700 SOEs that are a burden to the fiscus. For instance, government should reduce the number of SOEs to five hundred by, say, June 2020. A publicly available dashboard should be set up so that the public can keep track of the entities that are to be sold, listed, or where an equity partner will be required. Funds raised from a sale could be used to support those who will face job losses. Incentives can be given to those employees who want to start their own businesses or to those companies that are willing to train and employ.
Employee cost is often the biggest drain to an SOEs revenues. Strategic SOEs need to go through a right-sizing exercise, which will help close the wide gap between revenues and capital expenditure. A clear recapitalisation plan which would fall within the fiscal rules, needs to be committed to.
Labour unions can play a significant role in helping to identify new industries of the future. Unions can also ensure that government provides the necessary support for those who have lost their jobs through SOE restructuring and assist companies in the private sector, with the absorption and training of new employees who were previously employed by SOEs. Unions must be a supportive partner to both the government and the private sector and realise that compromises must be made by all.
The National Treasury released a policy document which includes practical short- and medium-term solutions to turning the economy around. So far, there has been little to zero adoption of their proposed measures. The longer we take to implement the much-needed reforms, the fewer the low hanging fruit and the more difficult it will be to adopt reform policies.
Rating agency Moody’s gave us three months to convince them that we can steer this ship in a different direction. Not enough has been done since the Medium-term Budget Policy Statement, so a downgrade is inevitable. How South Africa gets out of this economic rut will be very important. A quick no-brainer is the release of spectrum and the adoption of fiscal rules to protect the fiscus. A transparent solution is needed to offload and turn SOEs around and a healthy symbiotic relationship between labour, corporate SA and government needs to be forged.
* Thabi Leoka is an independent economist who has worked in financial services for over 17 years. She is interested in fiscal and monetary policy. This is also a member of the Presidential Economic Advisory Council. Views expressed are her own.