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South Africa: Seeking an economic revival

In this article, STANLIB’s Chief Economist, Kevin Ling’s provides a perspective on South Africa’s outlook for 2020 and beyond
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Kevin Lings

Kevin Lings

Chief Economist

BCom(Hons)(Economics)

Kevin has over 30-years’ experience and is responsible for domestic and global economic research, and forecasts. Additionally, he provides input into STANLIB’s asset allocation processes and relevant economic research for our Fixed Income, Property and Equity teams.

The big picture

The past six months have been extremely challenging, from a social, political and economic perspective. COVID-19 has disrupted every major economy, with more than 17 million infections recorded in the first seven months of 2020, resulting in almost 700 000 deaths. During this time, most countries imposed some form of lockdown for one to three months, resulting in a significant contraction in economic activity, a surge in government debt and a sharp rise in unemployment.

 

From an economic perspective, it has been extremely difficult gauging the extent of economic contraction in the first two quarters of 2020. It is also challenging to assess the prospects for an economic revival over the next few quarters. In June 2020, the International Monetary Fund (IMF) released its quarterly World Economic Outlook, aptly entitled A Crisis Like No Other, An Uncertain Recovery.

 

Encouragingly, while the IMF revised down its 2020 global growth estimate relative to its April 2020 calculations, it revised up the 2021 growth outlook. Overall, the IMF is now forecasting that global GDP will decline by a substantial -4.9% in 2020, down from its April 2020 estimate of -3%, but will grow by a very welcome 5.4% in 2021.

 

The downward revision to the 2020 economic outlook reflects the fact that the COVID-19 pandemic has had a more damaging impact on all aspects of society than anticipated at the start of lockdown restrictions. This is highlighted by the fact that the US shed 20.5 million jobs in April 2020 alone, and although they have already added back around 7.5 million jobs in May and June, the level of employment remains 14.7 million jobs below the peak prior to COVID-19.

 

Overall, all major economies, except China, are expected to experience an outright decline in GDP during 2020. Key areas of weakness include:

At this stage, it seems clear that global economic recovery in the second half of 2020 will face three key constraints, provided key economies are not confronted by a resurgence in COVID-19 infections.

 

  1. Persistent social distancing lasting well into the second half of 2020, leading to a significant drop in consumption and services output.
  2. Greater supply-side scarring from the larger-than-anticipated impact on activity during the lockdown in the first and second quarters of 2020. In this case, firm closures and an increase in unemployment may make it harder for activity to bounce back, even as the pandemic fades.
  3. A negative impact on productivity, as surviving businesses enhance workplace safety and hygiene standards. Companies’ efforts to stem the spread of the virus, such as staggered work shifts, enhanced hygiene and cleaning between shifts, and new workplace practices relating to proximity of personnel on production lines, will not only affect productivity, but will lead to additional business costs.

The local lens

Unfortunately, the South African economy was under severe pressure ahead of the COVID-19 lockdown at the end of March 2020. The impact of the lockdown was to push the economy into a severe and unprecedented recession and a full recovery will take a long time

The severity of the current economic recession, which has included a notable increase in unemployment and a sharp deterioration in government finances, has, understandably, heightened the need to improve SA’s economic outlook for 2021 and the country’s economic prospects over the next few years.

 

Infrastructure development: a sound solution

Unsurprisingly, given the record-low level of consumer and business confidence within the private sector, as well as government’s desire to remain at the centre of economic development, the recent policy announcements from government, and the ANC more broadly, have focused heavily on infrastructural development as a key driver of growth.

 

In fact, every major growth initiative or policy document in SA in recent decades has referred to the need to invest in infrastructure as a key source of economic upliftment. And for good reason. Over time, the government has established several institutions to strengthen the state’s capacity to improve infrastructure delivery. These have included, for example, the National Planning Commission, the Department of Performance Monitoring and Evaluation, the Presidential Infrastructure Coordinating Commission, and the Presidential Review Committee on StateOwned Enterprises (SOEs).

This does not mean that other policy initiatives, such as cutting interest rates or improving the ease of doing business, are unimportant. Instead, SA’s revival over the next few years is highly dependent on a wide range of policy changes being implemented successfully.

 

… still to be delivered

Unfortunately, while government’s infrastructural development plans have always appeared compelling in their scope and ambition, covering most areas of social and business infrastructure, projects have either been ‘permanently’ delayed, remained endlessly in the early stages of planning or have been scrapped due to budget constraints, changing political priorities, or simply a shift in the leadership of the institution or department needing to undertake the infrastructural development.

 

The result is that fixed investment spending by central government has dwindled while infrastructural development by SA’s State-Owned Enterprises (SOEs), which still control the bulk of the business infrastructure, have declined in each of the past four years and in seven out of the past ten years, leaving total investment spending by SOEs at their lowest level in twelve years. In fact, the current level of infrastructural investment is insufficient even to maintain SA’s existing infrastructural capacity, leading to a decline in a wide range of critical services, including, most recently, water and sanitation.

 

The pattern of highlighting infrastructure as a critical source of economic growth and then failing to implement the strategy, has led to successive bouts of disappointment, and as a result, a high level of scepticism. The business sector is likely to first wait for infrastructure upgrades to be completed before initiating large investment projects of their own that are dependent on the upgraded infrastructure for success.

 

The result is the level of fixed investment activity in SA is currently barely enough to simply maintain the country’s base of capital stock, let alone expand the productive capacity of the country and create job opportunities. It is telling that the capital stock in the manufacturing sector has declined by 17% since 2008, while the output of the sector has stagnated for more than a decade.

 

What next? A positive plan

More positively, the government recently held its first Sustainable Infrastructure Development Symposium, which was themed Investing in infrastructure for shared prosperity: now, next and beyond.

This is clearly a very welcome initiative that required significant preparation under difficult circumstances, given the limitations imposed by the COVID-19 lockdown. During the symposium, government highlighted a ‘shortlist’ of 55 infrastructure projects, categorised into six sectors, namely water and sanitation, energy, transport, digital infrastructure, agriculture and agro-processing and human settlements.

 

… and a collaborative solution to fund and implement

There are also important questions regarding how government intends to fund its infrastructure initiative. Over the past ten years, the government has become significantly more indebted, while the COVID-19 lockdown has led to a dramatic fall-off in tax revenue collection, which the Minister of Finance estimates to be in excess of R300 billion.

 

On 7 July 2020, the Standing Committee on Finance released its tabled report on the 2020 Special Adjustment Budget. The report states that the majority in the committee believe that government should engage with all stakeholders, including the private sector, on how to unlock domestic investment through impact investments and Regulation 28 of the Pension Funds Act. Specifically, the report states that; “National Treasury needs to consider creating the necessary regulatory mechanisms to ensure increased pension fund investments directly into infrastructure projects, including real estate, which can unlock capital that currently is not finding its way into projects.”

 

If this is done on a purely voluntary basis, it could prove highly beneficial, especially if the selected infrastructural projects encourage further private sector investment and are implemented in a timeous and budget-conscious manner, free of any corruption scandal. However, if the change in Regulation 28 effectively forces pension funds to invest in government’s infrastructure initiative, it could lead to several important and unintended consequences that negatively impact future investment, as well as the level of contractual savings in SA.

 

It also seems clear that most development initiatives in SA, particularly infrastructural investment, would benefit substantially from the increased use of public private partnerships. This is especially the case since government’s balance sheet is under enormous pressure at a time when economic growth has become much more vital and urgent. Equally, the corporate sector’s balance sheet remains relatively strong, but the sector lacks the confidence to unlock its potential through an increase in fixed investment and employment.

This article appears in the Q3 August 2020 edition of our StandPoint publication. Click here to download a copy of the full publication. 

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