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Presidential stimulus measures bring some hope

President Ramaphosa’s “new dawn”, announcement of the economic stimulus and recovery plan and pledge to turn the tide on corruption has created optimism.
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Kevin Lings

Kevin Lings

Chief Economist


Kevin joined then-Liberty Asset Management as an economic analyst in 2001. As STANLIB’s Chief Economist, he is responsible for domestic and global economic research and forecasts. Kevin also provides input into STANLIB’s asset allocation processes and provides relevant economic research for our Fixed Income, Property and Equity teams.

The Government is hopeful that the growth and recovery plan will reignite growth, stimulate economic recovery and secure confidence in sectors affected by regulatory uncertainty and inconsistency. The central element of the plan is the reprioritisation of around R50 billion of government spending towards activities that have the greatest impact on economic growth, domestic demand and job creation. Given the relatively positive global economic backdrop, the South African economy should be growing at around 2.5% to 3% instead of being in recession.


Remarkably, in the ten years prior to the global financial market crisis in 2009, South Africa was able to achieve an average annual growth rate of 4.2% with GDP growth peaking at 6% in 2007. Unfortunately, since the global financial market crisis, South Africa’s growth rate has averaged a mere 1.9%, slowing to an average of only 1% in the three years from 2015 to 2017.


More recently the South African economy has weakened further, slipping into recession in the first half of 2018. Although the extent of the latest decline in business activity is relatively modest, the economic performance during the first six months of 2018 is well below the level of growth anticipated at the start of 2018.


In January 2018 the consensus GDP forecast for South African economic growth was up at around 2%, with some estimates projecting growth as high as 2.4%. The consensus estimate has since fallen to below 1% and risks declining further if economic activity continues to languish. A growth rate of around 1% is far below the rate of expansion required to lift South Africa’s employment meaningfully as well as generate sufficient tax revenue to meet its various social and economic commitments.


The worse than expected GDP performance during the first half of 2018 has been fairly broad-based including sharp declines in agriculture (albeit off a relatively high base of output), manufacturing production, mining, and retail trade. In addition, most other components of the economy have experienced a moderation in output including construction and financial services.


Closing the gap between South Africa’s lack of growth rate and achieving 3% on a sustained basis is going to require a significantly larger effort than is now evident, including the co-ordination of policy efforts across key government departments.


Households are impacted by an economic recession in a number of ways. Firstly, and probably most importantly, during periods of recession many companies are forced to restructure their business to cope with the reduced level of business activity. This restructuring typically involves lower salary increases and the elimination of bonus payments, as well as the retrenchment of workers. Retrenchments can have a devastating impact on the physiological and financial wellbeing of employees, especially since these typically occur in an environment where workers struggle to gain alternative employment since most other businesses are simply not hiring given the tough economic conditions.


Retrenchments also tend to destroy household savings since many workers cancel investment products or use pension funds to fund monthly living expenses. This highlights how important it is that households not only undertake additional savings to adequately provide for their retirement, but also endeavour to establish an “emergency” fund that can be used to finance non-discretionary living expenses (for example mortgage and car repayments, insurance premiums and education expenses) for at least three months should a household member get retrenched.


An economic recession can also have broader implications for households. Government may increase taxes as it struggles to meet budgeted revenue projections. The value of the currency could decline as foreign investors become increasingly concerned about the lack of economic growth – typically a weaker exchange rate leads to higher inflation including a higher petrol price. Lastly, social tension might escalate including crime as young people become increasingly frustrated with the lack of economic opportunities.


Ultimately, South Africa’s long-term economic performance is directly linked to the growth in employment and household income. For example, if South Africa can add around 600 000 new jobs in a year (this equates to roughly the number of new entrants into the labour market in a year), then consumer spending would be expected to grow at around 6% to 7% in real terms. Equally, a stagnant labour market implies stagnant consumer activity and a lack of progress in improving household living conditions.


More positively, recent political changes are slowly starting to have a broadly positive impact on sentiment. For example, there have been significant changes made to how key state owned enterprises (SOE) are managed, including Eskom.


The growth-enhancing initiatives recently announced by the president include an economic stimulus and recovery plan which will be supported by the formation of an Infrastructure Development Fund.


Specific reforms and initiatives include changes to South Africa’s visa regime in an effort to boost the tourism sector, clarifying the Mining Charter to encourage investment and exploration in the mining sector, reducing the cost of doing business in order to boost exports and to make South African industry more competitive, introducing measures to support black commercial farmers and revitalising three regional and 26 township industrial parks as catalysts for broader economic and industrial development in townships and rural areas.


Critically, the latest growth initiative from government prioritises infrastructure spending as a key driver of economic activity. More specifically, the government will set up a South Africa Infrastructure Fund, inviting the private sector to enter into meaningful partnerships with government. Infrastructure expansion and maintenance has the potential to create jobs on a large scale, attract investment and lay a foundation for sustainable economic expansion. The contribution from the fiscus towards the Infrastructure Fund over the medium-term expenditure framework period (three years) would be in excess of R400 billion, which will be used to leverage additional resources from developmental finance institutions, multilateral development banks, and private lenders and investors. The IMF will not be approached to provide funding.


To ensure these funds are used effectively and that projects are completed on time and on budget, the government is establishing a dedicated Infrastructure Execution team in the Presidency that has extensive project management and engineering expertise to assist with project design and oversee implementation.


The stimulus measures are to be applauded since there is an urgent need to lift the country’s rate of economic growth as well as boost business confidence. Many of the growth initiatives identified are critical to the growth of specific industries or sectors. Unfortunately, from a macro-economic perspective, most of the measures announced are relatively modest, and unlikely to provide an immediate and very significant boost to economic growth and employment. This is the nature of stimulus packages that are based primarily on re-prioritising government expenditure. This does not suggest that the initiatives are unimportant, but rather that the focus will be on changing the priority of government spending to focus more directly on lifting economic growth and employment.


The key exception is the Infrastructure Fund, since it has the potential to provide a catalyst for additional private sector investment. In that regard, government needs to urgently identify key infrastructure development projects, complete a feasibility and environmental impact assessment and then implement the projects as quickly as possible. In the past, whenever government has announced an ambitious infrastructural developmental programme, it has largely failed largely failed to focus on implementing the projects in a timeous and efficient manner that adheres to budgets and completion deadlines. This lack of implementation has, over time, undermined the credibility of the South African government’s stimulus packages, thereby weakening business confidence.


Hopefully, the recent growth initiatives announced by the president will form the foundation for a sustained uplift in South Africa’s economic growth and employment.

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