Challenges now even greater
As always in January, the World Bank has updated its global and regional growth forecasts, and in SA’s case, it has raised its projection for 2018 by 0.2 percentage points to 1.1% for the year, up from an expected 0.8% in 2017.
It could have been worse, but it’s hardly good in a country in which the population is growing by 1.7% — and a world in which global economic growth is forecast at 3.2% in 2018. The bank sees SA’s growth reaching the 1.7% level only in 2018 and 2019. That would halt the steady slide in average living standards in SA over the past few years but isn’t nearly enough to reverse it.
The bank’s numbers would have been done before the ANC’s elective conference in December but they are, nonetheless, a sobering reminder that SA’s economic challenges are as great, if not even greater, now than they had been before Cyril Ramaphosa’s ANC victory.
The fiscal challenges are the most immediate. The tabling of the budget is hardly more than a month away, and the funding gap is even wider now than it was before the conference, thanks to President Jacob Zuma’s announcement on fees. Before, the finance minister was going to have to find R40bn in spending cuts and R30bn in new revenue measures to get SA back on the fiscal consolidation path. Now, with Zuma’s fee promise set to cost R12bn-R15bn in the first year, going up over the next three years to about R40bn annually, the minister will have to find even more — and even more still if the public sector wage negotiations go badly for the government. How to do that in a 1% economy, without making growth prospects even worse, is entirely unclear.
Nor are the budget deficit and government’s on-balance-sheet debt the only or even the most pressing fiscal problems. The state-owned enterprises could pose even more of a threat to the public balance sheet. Eskom’s debt problem is particularly large and its financial prospects are particularly fragile, especially after the national energy regulator cut its allowable revenue for the year.
Ramaphosa and his teammates are not yet in charge and it’s not yet clear when and how they might take over. When they do, tough decisions will need to be made. Even if Ramaphosa were willing to make those, it remains to be seen how constrained he will be by the fractures within the ANC’s ruling structures and by the party’s policies.
He has spoken of a target of 3% growth for 2018, rising to 5% in the medium term, but unless he can tackle some big priority issues, with urgency, that’s just cloud cuckoo land.
His election as ANC president has provided a significant boost to confidence and the rand, and that could help to provide a temporary boost to investment and growth in the short term. But confidence in itself is not enough to make SA attractive to investors, particularly the investment in the real economy that’s needed to boost growth significantly and sustainably. Changes in the real material conditions for investment are required to enable that, and whether the ANC government, old or new, is willing to make the changes needed to make SA more business- and investment-friendly is the question.
Some key signals will be needed straight off, starting with the appointment of new ministers to replace the most captured and incompetent, in portfolios such as public enterprises, mineral resources and energy. Installing competent and professional boards and management teams for state-owned enterprises would be one good signal — a necessary if insufficient condition to fix the likes of Eskom. Withdrawing the disastrous June 2017 Mining Charter would be another, as would resolute action on state capture and corruption. More market-friendly land policies would help too; the omens are not good given Ramaphosa’s comments on expropriation without compensation.
But markets are still looking to the upside and if he acts fast and firmly to do what’s needed to spark growth and investment markets he could start painting a better economic picture.
KEY SIGNALS ARE NEEDED STRAIGHT OFF, STARTING WITH NEW MINISTERS FOR THE CAPTURED ONES