Good news for our economy

MONSTER: PRECIOUS METAL EXPORTS UP TO 96.2% ON FIRST HALF OF 2020

Against all odds, SA’s economy has made an unexpected comeback, driven by strong commodity prices. The huge tax windfall from this has lifted government revenue, which will be used to fund a R350 social distress grant. However, the economy is not out of the woods yet, economists warn.

Tax revenue windfall helps fund R350 social distress grant for jobless.

Against all odds: economic gloom, the adverse impact of the Covid pandemic and the recent unrest, South Africa’s economy has made an amazing unexpected comeback, driven by a huge tax windfall from strong commodity prices, which have lifted government revenue.

At R57.7 billion, SA recorded a massive trade surplus in June – which Stanlib chief economist Kevin Lings has described as “monster” – pushed by precious metal exports, which in the first six months, rose to 96.2%, compared to last year.

This has made it possible for National Treasury to announce a R39 billion economic relief package funded by the higher-than-expected tax revenue, with the lion’s share going towards reinstating the R350 social distress grant for the unemployed.

However, economist Thabi Leoka warned the economy was not yet out of the woods.

“The strong trade surplus is not the salvation to our economic woes. SA needs to diversify its exports, support local businesses, open new markets for them, lower input costs and look inwards regarding beneficiation.

“The country should not rely on a commodity boom it has no control over,” cautioned Leoka.

Concurring with other economists in welcoming the huge boost in government revenue, Leoka said the trade surplus was “great news for the ailing economy”.

“The trade surplus is supported by the combination of a recovery in mining production, high commodity prices and strong demand for PGMs [platinum group metals] internationally.”

Despite a drop of 15.5% in PGM production in 2020, Leoka said PGM sales had increased by 40% due to higher prices.

“There was a sharp decrease in mining supply worldwide in 2020, as well as a fall in demand.

“Overall supply was down 17% for the year, while demand dropped by 7%,” she said.

With the mining sector accounting for about nine percent of gross domestic product, employing over 451 000 people, Leoka said revenues paid to the SA Revenue Service by the mining companies were the strongest recorded in years.

“These exceeded expectations and helped the country reduce its deficit, also allocating resources, providing financial support to businesses and citizens affected by the riots and insurrection,” Leoka said.

University of Stellenbosch sustainable development professor Mark Swilling said SA had deepened its dependence on exports of primary resources.

“This reduces incentives to invest in diversification, in particular job-intensive industrialisation.

“It is not a course correction, but the culmination of long-term trends – relative decline of manufacturing, devaluation of the rand and the beneficiaries being the mine owners, most of whom are now non-SA based shareholders,” said Swilling.

Economist Mike Schussler said SA was now in a strong commodity cycle, expected to last for more than a year.

“With high commodity prices, this was expected and has helped the rand – having kept inflation in check, via the stronger rand.

“As long as US interest rates remain ultra low, commodity prices will remain on the higher side.

“It looks like US rates will remain low for another 18 months.

“We have no increase in volumes of exports and we are not fully using this windfall,” said Schussler.

He described the big import in commodity oil as “hurting”.

“It will have an inflationary impact but things like cars and phones will be more stable due to a strong rand,” he added.

“I would consider the rand under R15 middle but under R14 as strong.

“Weak would be well over R16 to R17 to the dollar.

“Iron ore and coal prices are not bad, either. We also have lots of maize so that could help, too,” said Schussler.

University of Johannesburg associate professor of economics Peter Baur said global growth was driving the demand for commodities, especially energy.

Said Baur: “The increase in exports from South Africa is a positive development, bringing well-needed forex into the country, possibly stabilising and strengthening the rand.

“An increase in exports of primary goods will have a spillover effect into many secondary and tertiary industries, such as manufacturing, especially in motor vehicles, metal products, machinery and food.

“This will bolster business confidence, which is on the increase, while consumer confidence is still not looking great and has been decreasing during the second quarter.” – brians@citizen.co.za

Trade surplus not the salvation to woes