As an open economy, South Africa is more at risk in the global economic slowdown. This was the consensus view at the JSE SA Trade Connect panel discussion on Tuesday morning.
Between 2009 and 2017, the South African economy went backwards. Corruption, rising debt servicing costs, failure to pay value-added tax refunds on time, not to mention additional borrowing to fund Eskom and other state-owned enterprises (SOEs) has set the country back.
Investec SA chief economist Annabel Bishop says that despite talk of a ‘New Dawn’, the country is still bleeding. “The legacy impact of a near-decade of overspending continues to affect the debt figures, and weak economic growth afflicts revenue collection.”
The issue of time
After a decade of slow growth, the question is whether there is enough time and political will to make the necessary changes?
Bishop is worried that the changes are not happening quickly enough to resolve SOE debt, dragging down confidence and the currency, and says the country might run out of time.
“No, we are running out of time,” she corrects.
She says the legacy of poor governance during the 2009-2017 period has weakened economic growth prospects for the remainder of this year. Added to this is the overhang of SOE debt levels as well as the high regulatory and tax burden, which quells business and consumer confidence.
“The Eskom debt crisis continues to be a concern, dragging down the rand and resulting in low investor confidence.”
She says South Africa is showing a contraction in industrial production of around 8% before the power cuts this month, and until the uncertainties around the SOEs are resolved, the country will not see its economy grow.
“We must break out of the self-reinforcing negative cycle,” says Bishop.
The consensus growth forecast for 2019 is now at 0.5% year on year, from closer to 1.5% year on year at the start of this year.
And the latest government figures show gross debt was already at 58.3% of GDP at the end of June (first quarter), versus the 56.2% projected for the whole of 2019/20.
Gina Schoeman, director of Citi Research, says the knock felt by the primary and secondary sectors has now moved into the tertiary sector.
“Our tertiary sector and financial services have always been our darling sectors,” she says. “But because we have had a decade where the primary sector [agriculture and mining] and the primary sector [manufacturing and construction] have really performed very poorly, they demand fewer services and they provide less income.
She says that this knock-on effect has resulted in the tertiary sector [services, retail, tourism] registering lower growth than in the recession period South Africa experienced.
“That is a big concern because we are kicking the legs out of the economy,” says Schoeman.
Rating agency outlook
Last October, SA was downgraded to ‘junk’ status by rating agencies Standard & Poor’s and Fitch.
Schoeman says institutional strength is central to rating agency methodology. She says rating agencies such as Moody’s – which is holding off on downgrading SA to junk – are judging President Cyril Ramaphosa’s performance following the elections earlier this year.
She says the country could possibly receive a negative outlook, giving it enough time to implement all the proposed economic policies, before it goes back to being stable. Or the rating agencies could say they will give the review after looking into recent developments in a couple of weeks.
Solutions are all longer-term, structural
On the other hand, Isaah Mhlanga, Alexander Forbes Group chief economist, projects a negative outlook, due in part to lower economic fundamentals being worse than National Treasury expectations, and increased debt costs related to SOEs.
“We have to accept that all of the solutions available to us are longer-term, structural measures,” Mhlanga says.
Though the panel has confidence in the current administration’s ability to deliver the much-needed economic turnaround and boost investor confidence, it urges the private and public sector to work together to achieve sustainable solutions.