Green shoots for South Africa’s growth
2020 amplified SA’s fiscal and economic challenges.
Looking ahead, SA faces six positive growth catalysts.
Key to achieving growth are effective vaccine distribution and policy implementation.
The South African economy has gone through a difficult time in the last couple of years. It has experienced rising unemployment, persistently low economic growth, rampant corruption, a systematically weakening fiscal position, and a clear lack of policy direction.
Between 2015 and 2019, SA has achieved an average annual growth rate of only 0.8%, and it grew by a mere 0.2% in 2019. Unfortunately, this is well below the level of output required to generate a meaningful increase in employment.
Unemployment has remained stubbornly high. The unemployment rate has increased from 26.4% in 2015 to 29.1% in 2019, rising further to 30.8% in the third quarter of 2020 (using the standard definition). In addition, government debt has risen from a low of 26% of GDP in 2009, to an estimated 63.3% of GDP in 2019/2020. It is expected to have breached 80% of GDP in the 2020/2021 fiscal year.
It is clear that, prior to 2020, SA was already on a weak footing, both economically and socially. Unfortunately, the COVID-19 outbreak at the beginning of 2020 exacerbated the situation.
Despite government’s efforts to limit the economic impact of the outbreak, such as introducing a R500 billion fiscal relief package, the economy was brought to a near-sudden stop during the year. As a direct result of the Covid-19 related lockdowns, we expect South African GDP will contract by around 7.5% in 2020, with the unemployment rate expected to end the year at 31.3%.
Positively, however, as we enter a new year, SA finds itself in a rare but welcome position to benefit from a number of important positive events. Specifically, the economy is facing six positive developments that it can use as catalysts for a better, more sustainable economic performance.
1. Higher global commodity prices
The Covid-19 outbreak delivered a large negative shock to commodity markets. Almost all commodity prices experienced steep declines at the beginning of 2020 as a direct result of the pandemic. In the second half of the year, however, commodity prices rebounded quite strongly, with metals and mineral prices ending the year well above their pre-pandemic levels, driven by rising demand from China.
While metals and mineral prices were largely flat in 2020 as a whole, increasing by only 1% from 2019, the strong rebound in the second half of the year resulted in prices being 28% higher in December than in January 2020. Precious metals prices had an even better year, with prices increasing by an impressive 27% in 2020, boosted by the depreciation of the US dollar and lower interest rates.
Notably, during 2020, the gold price increased from $1 514 per ounce at the start of the year to $1 887 per ounce by the end of the year – a rise of over 24%. If you average the gold price for 2020 ($1 392/oz) and compare that with the average in 2019 ($1 770/oz), and adjust for the weaker exchange rate, the rand price of gold jumped by almost 49% year-on-year in 2020.
The improvement in the global price of gold, PGMs and iron ore in 2020 resulted in an estimated 24% growth in the value of South African exports during 2020, despite the fall in production. This improvement has had a major impact on overall export performance. Higher commodity prices have also benefited SA’s currency performance, trade balance and tax revenue collection.
South African mining exports make up around 66% of total mining sales, with export sales of PGMs, gold and iron ore accounting for 91%, 72% and 96% respectively of each commodity’s total sales. This puts the South African economy in a position to derive great benefit from commodities exports in early 2021.
While the outlook for 2021 remains uncertain and highly dependent on an effective global rollout of Covid-19 vaccines, January 2021 data shows a good start to the year for commodity prices. Metals and minerals prices and precious metal prices have already increased by 32% year-on-year and 23% year-on-year respectively in January 2021. With commodity prices expected to remain relatively elevated in 2021, the South African economy has an opportunity to continue to benefit from this trend.
2. SA’s trade and current account balance moving into a surplus position
SA recorded a record trade surplus of R270.6 billion in 2020, compared with a surplus of only R23.7 billion in 2019. This has helped the balance on the current account switch from a sustained deficit into surplus for the first time in decades.
A breakdown of trade data reveals that the surplus in 2020 was due to a combination of lower imports (-11.8% year-on-year, which represents a decline of -R149.8 billion in the rand value of South African imports) and an increase in exports (+7.5%, which represents an increase of R97.2 billion). It is also worth highlighting that there was a trade surplus every month from May 2020 to December 2020, with a remarkable average monthly surplus of +R34.2 billion in the eight-month period.
A detailed analysis of SA’s export performance in 2020 reveals, unfortunately, that the growth was highly concentrated. Increased exports of gold and platinum explain more than 100% of the overall increase in South African exports in 2020. In other words, if you exclude gold and platinum from the data, then exports would have declined by R103 billion, or roughly 0.5% in 2020, resulting in a significantly reduced trade surplus.
There was also an outperformance from other components of exports last year. For example, exports of citrus fruit, grapes and apples recorded combined growth of more than 31% year-on-year in 2020, which amounted to an increase of over R11 billion year-on-year. However, these increases were more than offset by large declines in other export categories, especially motor vehicles. In 2020, South African exports of motor vehicles (both passenger and commercial) declined by more than -22% in value, representing a fall-off in vehicle export revenue of almost -R32 billion.
While the recent surge in gold and platinum exports is extremely encouraging, providing much-needed relief for those sectors of the mining industry, it is critical that the authorities responsible for the formulation of economic and industrial policy urgently start to implement a range of critical reforms. These are needed to help a broader base of manufactured exports to achieve similar success – especially in a global environment that is likely to experience substantial growth in international trade over the next 24 months.
The large trade balance in 2020 has helped the country attract some foreign inflows and kept the rand exchange rate relatively strong, contributing substantially to GDP growth in the second half of the year.
3. Historically low domestic interest rates
Since March 2020, the South African Reserve Bank (SARB) has progressively reduced the Repurchase (Repo) rate, cutting it by a total of 300 basis points. This amounts to almost a halving of the bank’s reference interest rate within nine months. That can be considered a fairly aggressive reduction in interest rates, given that the Repo rate is currently at 3.5%, the lowest since it was introduced as a monetary policy tool. From our perspective, the policy response from the SARB has been entirely sensible, given global and local economic developments.
At the same time, not only has the inflation rate consistently surprised on the downside, but the SARB has managed to get inflation expectations anchored around the mid-point of the inflation target. While this achievement has been assisted by a range of unfortunate economic outcomes, especially in terms of economic growth and employment, it should lead to a more stable interest rate environment in the months ahead.
Both these developments mean that the SARB can afford to keep the Repo rate low and steady for an extended period. This does not only bode well for over-indebted consumers and businesses, but it should also help to boost domestic demand and spending once government has effectively rolled out the COVID-19 vaccine.
4. Improved South African tax revenue collection
Recent tax collection data shows that gross tax revenue collection continued to show strong recovery, improving more than expected towards the end of the year. Fiscal year-to-date, gross tax revenue has grown by -10.6%. While that is disappointing, it is higher than the revised growth estimate of -17.9% and much better than expected earlier in the year. It also reflects an improvement in tax collection in the second half of the year.
The outperformance relative to National Treasury’s estimates is a combination of three things. Firstly, National Treasury’s forecasts at the time of the Medium-Term Budget Policy Statement (MTBPS) were conservative, given the uncertainty around economic recovery.
Secondly, tax collection was helped by a strong rebound in corporate income tax from robust mining sector revenues, amid higher international commodity prices.
Lastly, personal income tax collection was higher than expected, which can be attributed to the fact that the increase in job losses was concentrated among low-income earners, whose contribution to personal income tax is relatively small.
The rebound in tax collection in recent months indicates that government’s total revenue collection is likely to be better than expected. This means that the shortfall will not be as bad as the R312.8 billion projected in the 2020 MTBPS. This will give government some additional funds that could be used for things like the procurement of COVID-19 vaccines.
5. Increased weekly government borrowing in 2020
In the middle of 2020, the South African government took a decision to increase the amount of debt on sale at its weekly auctions, in an effort to cover a rising budget deficit from the R500 billion fiscal stimulus package and a fall in tax revenue collection. The government decided to increase the amount of debt on sale at its weekly auctions by over R3 billion. The amount on offer at the fixed-rate government bond auction increased by R2.07 billion to R6.6 billion, while the weekly inflation-linked bond auction amount increased by R960 million to R2 billion.
The decision to increase weekly borrowing was successful, not only because the weekly bond auctions have been consistently oversubscribed but also because government borrowing is now well ahead of budget. The strong cash balance from the over-funding has given government some extra flexibility to buy the required vaccines for the country; plug unexpected spending requirements like assisting SOEs; or fund future budget deficits, which would reduce future borrowing requirements.
6. Increased foreign investment into SA
Throughout 2020, foreigners have been systematically disinvesting from SA, amid both increased risk aversion following the COVID-19 outbreak and an increase in the country’s sovereign risk. Between January and December 2020, foreign portfolio outflows amounted to R251 billion, with outflows in 10 of the last 12 months. A breakdown of the outflows reveals that R125 billion is attributable to equity outflows, while R132 billion is due to foreign investors selling government bonds.
Given this level of disinvestment, it is understandable that foreign ownership of South African government bonds has fallen from a peak of over 42% in early 2018 to just under 29% in October.
Positively, the trend seems to be reversing, with an increase in foreign investment since November, especially in the bond market. In November and December 2020, foreigners bought South African government bonds for the first time since June 2020, buying over R9.5 billion in November and R17.5 billion in December. The ratio of foreign ownership of South African government bonds increased from 28.96% of total ownership in October 2020 to 30% in December 2020.
While it is sometimes easy to dismiss foreign portfolio investment as “fickle”, the reality is that foreign portfolio investment has been SA’s only real source of foreign investment for many years. Without regular foreign investment inflows, it will be near-impossible for the country to fund a meaningful and prolonged economic upswing that includes substantial infrastructural development – partly because SA has an extremely low level of domestic savings.
SA needs to take advantage of these opportunities
Going into 2021, it is critical for SA to capitalise on these opportunities, to ensure that positive momentum is created so that the economy can start the process of recovery (in the short term) and prosperity (in the long term). However, to fully take advantage of the positive events that unfolded towards the end of 2020, two things must happen.
Firstly, SA must find a way to meaningfully increase economic growth. For this to happen, government needs to start implementing at least part of its policy strategy. In general, government has done a good job in constructing comprehensive policy documents that identify and outline the most important issues facing the country. This includes the infrastructure initiative and the Economic Reconstruction and Recovery Plan. Unfortunately, all these initiatives and policy priorities have lost momentum as the year has progressed. Re-igniting some of these initiatives will be vital in starting the push that the country needs to take advantage of all these positive developments.
Secondly, to save lives, fully re-open the economy and release the pent-up demand within the economy, the government will need to successfully distribute the vaccines within the country. Consequently, limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges should be key immediate priorities for SA. Government needs to take advantage of the vaccine dividend that will come from efficiently implementing an effective vaccine rollout plan.
If these two things are done, in an environment where global economic activity seems more prosperous, the economy will release some pent-up demand from consumers and businesses, improving confidence and ensuring that SA is on a better growth path. Alternatively, SA can let these positive developments pass it by, just adding them to the list of opportunities that the government, has, once again, failed to take advantage of.