Investor confidence may never fully recover
At the end of June SA’s economic narrative swung into positive territory. The catalyst was bold energy reform, which unleashed the prospect of billions of rand in green energy investment. This, coupled with a robust firstquarter recovery driven by the commodity boom, transformed SA’s immediate fiscal and growth picture.
Suddenly it was possible to imagine a future without loadshedding, where the debt ratio and SA’s credit risk were falling in tandem, and positive per capita growth restored after years of steady decline.
But before the constructive mood could gain a foothold, it all came crashing down in an orgy of looting and violence.
The events of the past week have set back SA’s economic recovery, steepened the challenge of dealing with poverty, inequality and unemployment, and completely undermined investor confidence, something which may never fully recover.
Fortunately, given the headroom created by the first quarter rebound most economists cut their wholeyear growth forecasts this week by less than a full percentage point. This means the 2021 growth consensus will probably fall back to around the mid-3% range, wiping out the recent exuberance but not completely derailing SA’s recovery.
More concerning are longerterm fiscal and investment implications. Fiscally, SA has a slight buffer thanks to the commodities boom, which has laid the basis for a potential revenue overrun of up to R80bn this year. Only, instead of being used to run down debt, reduce SA’s credit risk and the cost of borrowing, this will now be absorbed by the imperative to support the businesses wrecked and people rendered jobless by the unrest.
At a minimum, the government is likely to reinstate the special Covid relief grant of R350 a month, which would cost about R30bn a year for 6.9-million adults. More problematic would be if it decided the best insurance policy against future unrest is to introduce a basic income grant, as intimated by President Cyril Ramaphosa at the weekend.
Given that the roots of the recent unrest lie in unemployment and poverty, a basic income grant may seem a small price to pay for future social and political stability. However, a basic income grant set at the R585 a month food poverty line for the 22.5-million adults not formally employed would (at about R160bn a year) double the country’s welfare bill, leaving little to spend on anything else.
The government would be reduced to a tax-and-transfer agency, scuppering the notion of the developmental state, something an ANC government would be reluctant to accept. However, in the absence of rapid economic growth, a basic income grant would not be fiscally sustainable unless funded through constant tax hikes, which would be growth dampening, hastening SA’s downward spiral, or by taking a scythe to state jobs and shuttering state services.
But even if a basic income grant isn’t adopted it will now be politically impossible to pursue the Treasury’s fiscal austerity plan, which earmarked defence, social security funds, education and the police for real spending cuts. Only, once fiscal austerity is abandoned the debt ratio will gallop towards 100% of GDP, with all the attendant risks this entails.
The only sustainable solution is economic growth. As such, the hope is that the events of the past week have so shaken the government that it unleashes a wave of reforming zeal so powerful that it overwhelms the anguish and distrust lodged in the national psyche. Because that is what it will take to get South Africans investing again.
But let’s not kid ourselves: with the government’s gross incompetence and incapacity laid bare, the challenge of reigniting growth — let alone overcoming unemployment, inequality and poverty — looks, frankly, insurmountable.
As tempting as it is to throw up one’s hands in horror and walk away, most South Africans do not have that option. Instead, by rallying together to rebuild, affected communities have shown that they will not give in to lawlessness and tyranny. It’s not going to be enough, but it is at least something to build on.