There have been several economic developments in recent weeks. This statement seeks to provide some context to these developments, and inform the public about government interventions to stimulate inclusive growth.
On 1 June 2017, Fitch affirmed South Africa’s long term foreign and local currency debt ratings at ‘BB+’ ratings with stable outlook. S&P followed on 2 June 2017 and affirmed the long term foreign currency debt rating at ‘BB+’ and long term local currency debt rating at ‘BBB-’ with negative outlook.
As reported earlier in the week, South Africa’s Gross Domestic Product contracted 0.7% between the first quarter of 2017 and the fourth quarter of 2016. This followed a contraction of 0.3% between the fourth and the third quarter of 2016. This trend unfortunately implies that our economy has entered into a recession.
In this context, our 2017 growth projection of 1.3% may not be realised. This continues the trend of low growth over the last several years, undermining our progress in significantly reducing inequality, unemployment and poverty which fundamentally disadvantages a large portion of our population, and is the cause of social instability. It therefore requires all social partners to reflect on our progress in bringing about inclusive growth and economic transformation, and to do all that we can and more, from our respective positions.
Moody’s, on 9 June 2017, downgraded South Africa’s long term foreign and local currency debt ratings at ‘Baa3’ with negative outlook. Moody’s rating action concluded the 90 day review process where South Africa’s ratings were put on credit watch for possible downgrade. All three ratings agencies have raised similar issues such as: the slow pace of growth-enhancing reforms; growing contingent liabilities amid poor governance at key SOCs; and political risks, among other issues.
Our sovereign credit rating has huge macroeconomic impact, and affects government, business, and ordinary South Africans alike. We are committed to restoring it to a favourable investment grade rating with a positive outlook as quickly as possible. However, we should not lose sight of the fact that we need to address the issues they raise, first and foremost for the good of our country and to advance our national development.
We need to want to do the right things for our economy and our society, not just because credit ratings agencies are watching. Obviously these developments are not what we would have hoped, however it is critical that we are not despondent at this time. I cancelled my trip to Germany this week where I was to attend the G20 Africa Partnership Conference, because I felt it is critical to ensure that we respond appropriately to the disappointing economic performance of Q1.
Government has been deeply engaged with the issue of the recession, analysing its impact on our growth target, and considering an appropriate response. We discussed it in depth in Cabinet last week. President Zuma convened an urgent meeting with several Ministers last night where we discussed critical interventions which need to be taken. The President has stressed the urgency of a coordinated response, and is convening a full day meeting in two weeks, of various economic cluster and Ministers responsible for key sectors, to address obstacles delaying the finalization of policy processes and agree urgent timelines.
We have also met with the business sector, having held meetings with Business Unity SA (BUSA), the Black Business Council, the Black Management Forum, the Association of Black Securities and Investment Professionals (ABSIP), and the Black Investment Managers Business Forum. We are meeting the Manufacturing Circle later today. At all of these interactions we have engaged frankly on the state of the economy, how to get it back on track, and what short and long term measures must be taken to advance our national development.
We are at an inflection point where we can choose to be negative and pessimistic, or positive and optimistic. As National Treasury, based on our analysis of the global and domestic economy, we truly believe the glass is half full, not half empty. In this spirit, we’d like to convey several key messages today which I will go on to unpack.
Firstly, we have made real progress, but it will take some time for some of our interventions to impact the real economy and result in improved growth. Second, government is committed to maintaining the fiscal framework announced in the Budget and the medium term strategic framework. The executive Finance leadership is also committed to maintaining the stability of National Treasury as an institution. Thirdly, we have heard the call from business and investors that providing policy certainty and stabilizing and revitalizing state owned companies are among the most important short term steps we can take to restore confidence. Fourth and finally, inclusive growth and economic transformation are the top priorities of government, and are mutually reinforcing. We must and will, advance both of these.
Early signs of progress deserve patience, despite recession
We are seeing some progress despite the contraction over the last two quarters. It is worth highlighting that the economy, however low, expanded by 0.6% on a year on year comparison between the first quarter of 2016 and the first quarter of 2017. We can still work hard to ensure that this is held up for the rest of the year. The worst contractions were seen in trade; electricity, gas and water; and manufacturing.
Weaker trade activity reflects strained domestic demand, as consumer and business confidence have not improved and credit extension remains weak and potentially exacerbated by the impact of tighter banking regulation, as well as high unemployment. Yet within the cloud of the overall recession, there is a silver lining to be encouraged about.
Encouragingly, growth in investments as reflected in gross fixed capital formation, expanded by 1.0% between the quarters, following a 1.7% expansion between the fourth quarter and the third quarter of 2016.
Private sector investment rose for the first time since the third quarter of 2015. Mining and agriculture are among our economy’s traditional strengths, and weakness in these sectors in recent years have been among the major drivers of our low growth. Therefore we are encouraged to see a recovery in agriculture after a very long period of drought. The agriculture, forestry and fishing sector grew by 22.2% q/q. The growth was due mainly to higher production of summer grains, oil seeds, and horticulture products, as climatic conditions have improved in many parts of the country.
Growth in mining and quarrying also rebounded to 12.8% q/q, driven by higher production of gold and other metal ores, including platinum. The improvement in the mining sector in particular, can be partly attributed to improved labour relations, which has been one of the successful outcomes of government’s intense engagement with the social partners over the last two years.
Other successful government interventions include having moved from electricity shortage to surplus, and launching Invest SA, making it easy to open a business and invest in South Africa. These interventions have resolved issues which until very recently has been seen as major binding constraints on growth.
The rebound however, will not be immediate. Production capacity which was lost due to electricity unavailability or bitter labour disagreements will take time to be reconstituted.
The low growth environment also reflects the extent of low business and consumer confidence. Growth and confidence are mutually reinforcing. We can’t say how much growth can be restored if all social partners begin to talk up what is working in the economy, but we know for sure that fixating on our challenges will not help us. So we call on everyone in South Africa, business and all social partners, across all political affiliations, to focus on working together to drive inclusive growth.
Our analysis of the economy in Q1 indicates several trends which require focus going forward:
1. We need to leverage on improved conditions in agriculture to advance agro processing and increase support for small and large scale farmers.
2. Finalization of key policy in mining in critical to unlock investment and leverage on improved commodity prices and favourable exchange rate effects.
3. We need to speedily finalize review of incentives in the manufacturing sector to better expose areas of slack and low value for our resources, and scale up support for industries with the largest potential. We will explore funding for a new economic competiveness support package. The DTI’s Agro-Processing Support Scheme is a welcome development, it is critical that we build on our strength in agriculture by capturing more of the value chain through processing. Work is underway between the National Treasury and the Department of Small Business Development to explore additional mechanisms to support small business. This has become an urgent matter.
4. Some business stakeholders are complaining about tightness in the credit market. We will engage the finance sector and our colleagues at the South African Reserve Bank for a better understanding of possible interventions, within our regulatory framework. This is critical for supporting business investment and general credit to households.
Maintaining the fiscal framework and stability of National Treasury
Over the last two and a half months, the Deputy Minister and I have had numerous candid discussions with domestic and global investors, as well as the credit ratings agencies. One of the major worries that has been consistently raised is whether we are committed to maintaining the fiscal framework set in the medium term strategic framework and the 2017 budget. We continue to reiterate that the fiscal framework is the policy of government; we support it, we are bound to it, we will implement it.
South Africa has a world class, transparent and predictable budgeting process. Not only myself and the Deputy Minister, but Cabinet and the ruling party, have committed to implement it as outlined. In this regard we hope that these worries will diminish quickly as we approach the medium term budget statement in October.
A related concern was around the stability and leadership of National Treasury, following the departure of former Director General, Lungisa Fuzile. We promised to quickly appoint a capable leader for Treasury who could ensure stability and continuity. We are pleased to report that we have delivered on that promise, with the appointment of new Director General, Dondo Mogajane last week. Mr Mogajane has a wealth of experience having spent the better part of 18 years at National Treasury, while bringing laudable energy and passion to the role. We have the utmost confidence that he will serve the institution and the country well going forward. We will give him a better welcome internally in the coming days.
Policy certainty and stabilising state-owned companies
In our stakeholder engagements, one of the key messages we have heard is that the two most important things government can do in the short term is to provide policy certainty, and to stabilise and revitalise our state-owned companies (SOCs). Cabinet has resolved that we need to conclude some unfinished policy discussions and execute with speed to unlock investment which will spur growth, job creation and economic transformation.
- We need to create policy certainty and fast track the following:
- The Mining Charter and the Mineral and Petroleum Resources Development Act
- Rollout of broadband, or high-speed internet, to all communities
- Allocation of telecommunications spectrum
- Conclusion of Independent Power Producer agreements
- Land and agrarian reform
- Finalising processes to improve governance and financial strength of SOCs.
For its part, the ANC also stressed on Saturday that it will contribute to policy certainty through its policy and national conferences in June and December respectively, which will outline ANC policy for the next 5 years.
With respect to SOCs, National Treasury is the shareholder representative for SAA. We are also committed to strengthening the board, by filling two vacancies, including by appointing a person with deep aviation experience and expertise. As you know, Cabinet appointed the Board Chair for a final term. At the upcoming AGM, we will attend to the matter of appointing her successor. We will be recommending a Chief Executive to Cabinet in the coming weeks.
One of the other major concerns for all economic stakeholders has been Eskom. We are confident that the Minister Brown will fill vacancies in the board and executive leadership of Eskom, with leaders who will instil confidence. We look forward to further positive developments there.
We must advance both inclusive growth and economic transformation
In our engagements with business, particularly representatives of black business, it became clear that it would be a mistake to react to the recession by focusing only on the growth of established business, and letting economic transformation fall by the wayside. We need to advance inclusive growth and economic transformation.
The NDP argues that we need to do both. You cannot do one, without the other. They are mutually reinforcing. It is time that individuals and groups who supported the NDP when we adopted it, who say now that they support it, stop supporting only the parts of it which are convenient for them. Yes we want the economy to grow. We want big businesses to expand, we want small businesses to expand, we want new businesses to start and expand. And, we also want industries to transform, to include black people and women in ownership, in top management, in professional work. It is not optional or a nice to have. It is a core aspect of our nation’s development. We need both.
Wealth creation by the previously disadvantaged in SA will have more of an impact than the currently wealthy getting 5% wealthier. We want to see our top listed companies record double digit annual revenue growth. We would also like to see black owned businesses who currently have single digit market share in industries like financial services, auditing, and construction double their market share. That will create new wealth and new economic players. Accordingly, we have heard the call from black business to be more proactive. There are at least three measures the Finance family will take in this regard. We will work with the financial sector and our colleagues at DTI to adopt and implement a new Financial Services Charter.
ABSIP has stressed that the Black Business Growth Fund proposed in the Charter – a potential R100 billion fund dedicated to funding black businesses – could be a potential game changer. We must do all within our power to bring bold initiatives like this to fruition.
We will fast track public consultation and finalisation of the Public Procurement Bill. It must enable a modernised public procurement regime which will have economic transformation as its core mandate, and maximize the developmental impact of the more than R500 billion government entities spend every year procuring goods and services, by targeting and increasing access for black, women and youth owned businesses, township entrepreneurs and others. Economic transformation must not be an afterthought, but at the centre of procurement strategy, reporting and performance management.
We will develop proposals to increase the amount of assets the Public Investment Corporation and other state entities gives to black asset managers to manage. Asset managers play a major role in the economy, in influencing corporate strategy, the character and pace of transformation, and the scale and nature of investments.
We must grow the share of assets under management of black asset managers with proven track records and experience.
We are all frustrated by the lack of growth which if sustained, will compromise our ability to rapidly reduce unemployment, poverty and inequality. The NDP set our nation the task of driving inclusive growth and economic transformation as two necessary, mutually reinforcing and overarching objectives which enable us to resolve our national challenges.
Nowhere in the NDP does it say it would be easy.