Reform Needed
South Africa looks to chart a difficult road to economic recovery after a COVID-19 impacted 2020
Over the past few years, South Africa has struggled with weak growth, rising unemployment and mounting public debt. Even before the COVID-19 pandemic struck, recessionary pressures were acute, with the economy in a technical recession, given two consecutive quarters of negative growth in the latter half of 2019.
COVID-19 changed the already challenging economic outlook for the worse, further exposing deep structural divides in the economy. With strict lockdown restrictions in place since end-march 2020, South Africa prioritized its response to the health crisis by aiming to save as many lives as possible.
This prioritization saw the country face an almost unique situation in its history - economic activity faced a system-wide shock from both supply and demand sides, coming to a complete halt for a number of weeks in the second quarter across many sectors. Real GDP dropped by 51 percent quarter on quarter (seasonally adjusted and annualized) in Q2 of 2020, after a 1.8 percent quarter on quarter (seasonally adjusted and annualized) contraction in Q1.
Most affected sectors
According to data released by the Statistics South Africa, the economy-wide slowdown was most felt in the manufacturing sector - which contracted 74.9 percent quarter on quarter (seasonally adjusted and annualized) and made the largest contribution to the overall slowdown. The second-largest contribution stemmed from the trade and accommodation sector, which contracted by 67.6 percent quarter on quarter (seasonally adjusted and annualized). In the third place was the transport sector, down 67.9 percent quarter on quarter (seasonally adjusted and annualized). The agricultural sector was the only one that posted growth, albeit marginal.
Household spending saw a similar slump given curfews and limitations on movement, as well as lockdown restrictions on
retail, leisure, and travel sectors. The biggest spending knocks were seen in semi-durable and durable goods.
Worker layoff was another adverse result. South Africa’s unemployment rate (narrow definition) increased to a record high of 30.8 percent in Q3 2020, after a record total 2.2 million jobs lost between April and June 2020.
While consumers regained some confidence in Q3 as parts of the economy opened up, consumer confidence remained in negative territory. Deloitte research in October 2020 showed that South African consumers continue to have concerns about making upcoming payments, are delaying large purchases or are worried about losing their job.
Nonetheless, there are some green shoots sprouting from the bleak economic landscape. Data from Statistics South Africa for Q3 showed that mining production increased by 40.6 percent (quarter-on-quarter, seasonally adjusted), while manufacturing output climbed by 32.9 percent quarter on quarter (seasonally adjusted).
Another indicator showing a rebound is an uptick in vehicle sales, with seasonally adjusted motor trade sales increasing by 6.8 percent in August 2020 and 2.6 percent in September. These increases are encouraging signs following the record contraction a few months earlier.
Growth stimulation options
Despite this, the economic fallout for 2020 is expected to be severe, with South Africa’s National Treasury expecting a real GDP contraction of 7.8 percent in 2020.
Given the magnitude of the expected contraction in an already-weak economy, the need for concerted action to transition onto a path of economic recovery is urgent. Policy tools, such as the government’s emergency fiscal stimulus and an easier monetary policy stance, are likely to only cushion some of the worst impacts.
The National Treasury proposed in its Medium-term Budget Policy Statement (MTBPS) a number of options to stimulate growth. These include: a five-year fiscal consolidation path that promotes growth and reigns in debt; reforming the electricity sector by allowing procurement from independent power sources, unbundling power utility Eskom into separate business
The economic fallout for 2020 is expected to be severe, with South Africa’s National Treasury expecting a real GDP contraction of 7.8 percent in 2020.
units, and allowing municipalities to buy electricity from different sources; supporting investment in infrastructure, including making it easier for pension funds to invest in infrastructure projects; and easing regulations and improving the overall ease of doing business.
Macroeconomic projections to 2023 forecast a rebound of 3.3 percent in 2021 from the sharp contraction in 2020, with growth moderating thereafter (1.7 percent and 1.5 percent for 2022 and 2023 respectively).
With a fast-expanding debt-to-gdp ratio and limited fiscal space, the biggest priority outlined in the MTBPS is the urgent need to maintain fiscal consolidation, while enacting immediate pro-growth reforms. Funding is expected to come from a rising borrowing component, as well as the reprioritization of departmental spending.
Focus is also on moving from consumption-led growth toward investment-led growth, and particularly, private investment-led growth. The cornerstone of this initiative is the infrastructure fund that is designed to crowd in private-sector finance.
While this supports the South African Economic Reconstruction and Recovery Plan released in mid-october 2020 - which focuses on job creation through infrastructure investment, reindustrialization, speeding up economic reforms, combating crime and corruption, and creating a capable state - it is likely to face a number of challenges.
Challenges to growth plan
The biggest challenge to the recovery plan is government’s rising debt. South Africa spends ZAR2.1 billion ($138.6 million) per day on borrowing costs - the fastest-growing expenditure item in the medium term. The ability to reign in debt has been further hindered by an expected sharp contraction in tax revenue as a result of the COVID-19 pandemic. Raising taxes is unlikely to bring in additional tax revenue.
The risk South Africa thus finds itself in is that if spending is not disciplined enough, it is inevitable that the country will need to turn to international financial institutions for aid.
Furthermore, the proposed budget adjustments require a drastic slowdown in public-sector wage growth. This could have several ramifications down the road.
Also, the reduction in spending across departments may adversely affect economic growth and welfare, especially for the poorest households - arguably the most severely affected by the consequences of the pandemic - over time.
The need for economic reforms is now more urgent than ever before. While it has been difficult to do until now, this might be the opportunity for South Africa to strictly focus on pro-growth reforms that will unlock a new growth path, one that is inclusive and more sustainable, but also more competitive and resilient, and raises economic expansion above the meagre figures that the country has experienced in the years leading up to the pandemic.
Vital focus areas, which will require consolidated efforts from both government and the private sector, include increased spending on infrastructure investment, reducing wasteful expenditure and corruption, unlocking efficiencies and opportunities presented by the digital economy, as well as a focus on implementation.
In short, South Africa faces a difficult road to recovery. Scripting this recovery is likely to only be in the realm of possible if all stakeholders come together to drive a coordinated and proactive program to rebuild the economy. CA