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What Level 1 will mean for SA’s economy

For SA to start attracting foreign capital again, ‘nothing shows commitment and intent more than actual implementation,’ emphasises Sanlam Investments economist Arthur Kamp.

NOMPU SIZIBA: There’s talk that President Cyril Ramaphosa could soon announce the economy is  moving down to Level 1 of the Covid-19 risk-adjusted strategy. If that happens, what are the implications? Also, the Reserve Bank makes a call on interest rates on Thursday. Is it likely to cut rates, especially following the terrible Q2 GDP reading? Economists are divided on whether it will further cut, or not.

Well, to discuss these matters further, I’m joined on the line by Arthur Kamp. He’s the chief economist at Sanlam Investments. Thank you so much for joining us, Arthur. So, from where you sit, how badly does this economy need to move to Level 1 of the lockdown? And, most importantly, what does this imply?

ARTHUR KAMP: Good evening, Nompu. Certainly there are sections of the economy that do need it. We know that large parts of the economy are now operating – or can operate – at full capacity. But of course, there are sectors that are suffering at the moment, in particular tourism accommodation. So if we just look at the notice late in June, accommodation income was down 95% year on year. We know that foreign travellers to South Africa are down 95% as well, year on year. We know that total tourism accommodation on a seasonally-adjusted basis had only an  8.6% occupancy rate in June. These numbers are dire.

So very clearly this sector will be looking to relief in terms of opening up. The key thing to look for in anticipation of going to Level 1 is of course air travel, the restrictions, and to what extent those restrictions would be removed. And I think that if we look at where South Africa tourism comes from, certainly it’s global, but three-quarters of arrivals come from the African continent, our region. And perhaps if we can get air travel opening up to the region, that could really give our local industry something of a significant boost.

Of course, we would also be looking elsewhere. I think if we had to open up to international travel, anyway, it would probably come with some restrictions. There would be issues clearly about what other countries have in place in terms of restrictions, and also when the quarantines would be required.

But I think that this would give the economy an additional boost. The third-quarter numbers are beginning to look a lot better. They are not back to pre-Covid  levels, but I think the economy in the third quarter is going to deliver a strong dance. And, if we move to Level 1, it would help to accelerate it and give it some underpin.

NOMPU SIZIBA: So when we hear Finance Minister Tito Mboweni warn that his office may have underestimated the extent of the contraction in the economy for the entire year, are you surprised? Based on your number-crunching, what are your estimates?

ARTHUR KAMP: Nompu, I’m thinking minus 8% for the year. And I think from what we’ve seen so far, yes, that first and second-quarter GDP was a little bit of a downside surprise, but not a lot. And, from what I’m seeing, tracking the sort of official data, but also the alternative data sources, I think that the third quarter is going to surprise on the upside.

So I’m comfortable to sit for now with current information at minus 8% for this year – with a possible significant positive bounce next year. But unfortunately it’s going to be a long time before we get back to pre-Covid income levels.

NOMPU SIZIBA: Yes. The Reserve Bank makes a call on whether to further stimulate the economy with another interest-rate cut. On balance, what do you think they’re going to do?

ARTHUR KAMP: I think they are going to cut. That’s my expectation, but there’s no guarantee there. There are reasons to be cautious. We know that the bank has indicated fiscal policy, has flagged that, and when fiscal policy starts to go awry it does put up the pressure on real interest rates. We’ve seen long-term interest rates are particularly high in real terms. So that’s a consideration.

There  is also perhaps something of an argument that the last number showed a bit of a feed-through from currency weakness, perhaps into car prices, But on balance I think that there’s not strong evidence for that. I also think that with core inflation only at 3.2% – yes, it’s going to go up a bit next year, it’ll still probably remain around the midpoint of the inflation target on average next year.

And then, of course, the big key number for me right now is the unemployment rate. It was 31% pre-Covid and it’s going up, and we could lose up to 10% of the labour force in terms of jobs last year.

So I think that the sheer weakness of the economy, even though it is improving in the third quarter, should sway it towards a rate cut. But unfortunately there’s no guarantee because of those limitations I discussed.

NOMPU SIZIBA: What you say about the unemployment level is too dire to contemplate. Of course monetary policy can only help so far, and one of our previous speakers, our market analyst, was saying there’s so much reliance on monetary policy, but one would want to also look to the fiscal side. What levers do we have on the fiscal side to help lift the economy? The president has talked about some sort of recovery plan, and we desperately need it to be implemented like yesterday.

ARTHUR KAMP: Absolutely.

So to improve fiscal policy we’re going to have to improve the economic growth rate. And that’s going to require widespread structural reform of the economy.

The issue with that, of course, is we want to implement that today and it’s going to take a while before sustained strong growth comes through.

So what you need to do in the near term is, as far as possible, tackle the other problem that we have, and that is that we’re paying a lot of interest on our debt. That is obviously crowding out other expenditure. And so we need to change the narrative in the near term. We need to change the expectation from we’re going for further sovereign-debt rating downgrades – okay, we’re not going to upgrade anytime soon – to at least stabilisation.

Against this global backdrop of very loose global monetary policy and lower interest rates abroad, if we can show in the upcoming mini-budget a credible plan to get South African fiscal policy back into a sustainable position, we can change the narrative towards an expectation that we’re beginning to stop the slide. Of course, we would have to make some bold announcements and also show at least some first initial steps on economic reform.

If that narrative changes and we start to attract foreign capital again, it could possibly put downward pressure on real interest rates and relieve some of this pressure in the near term. But, quite clearly, it’s at the point now where implementation is critical because nothing shows commitment and intent more than actual implementation.

NOMPU SIZIBA: That’s right, indeed. Arthur, thank you so much for your time. That was Arthur Kamp, the chief economist at Sanlam Investments.


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