Can SA still be salvaged?
IF THE RIGHT ANC LEADER COMES IN The country hasn’t suddenly plunged into a deep recession, the decline has been gradual.
Earlier in June, GDP growth numbers confirmed that SA experienced a technical recession in the first quarter. Nobody could have been shocked. SA’s economy is very obviously in a poor state. This is made more concerning by the fact that global conditions are currently supportive of the economy.
Investment Solutions economist Lesiba Motata pointed out at the CoreShares ETF Exchange on Thursday that the strong rand is helping imports, there is continued demand for our raw materials and growth in the US and China is positive for the world. However, South Africa is not taking advantage of this.
“What we are experiencing is very idiosyncratic and domestic in nature,” said Motata. “The challenge is that even though as a small open economy, we are being helped by the globe. The Cabinet reshuffles and junk ratings are dampening confidence.” These are thwarting the fledgling growth that was coming. The economy has been stagnant or even declining for some time. “It’s the market definition to call it a technical recession after two consecutive quarters of negative growth,” said Citibank economist Gina Schoeman. “But there are other definitions of recession, such as running below your potential growth rate. We can all agree that we’re well below it.”
A key problem is the persistent high level of political uncertainty that is discouraging investment. Schoeman also pointed out that SA has been in a downgrade cycle since 2012. During that time, government has failed to implement reforms to halt further downgrades. Unlike Brazil, SA hasn’t suddenly plunged into a deep recession. As Standard & Poor’s (S&P’s) sub-Saharan Africa’s regional head Konrad Reuss pointed out, the decline has been gradual. He added that some indicators, however, still remain positive for ratings agencies. S&P’s institutional assessment is still neutral and monetary policy and the monetary framework are positive.
“But you get the feeling they are busy undermining what is left,” Reuss warned, citing the threat to operational independence and inflation targeting at the Reserve Bank.
He added that while S&P accepts the need for transformation in SA, it needs a robust base from which to happen. “From a ratings perspective, that transformation would best happen in a faster-growing economy, where National Treasury has greater fiscal flexibility to support it and where investor sentiment is on our side,” said Reuss. So what must SA do to prevent a downgrade spiral?
“We would want to see accelerated structural reforms that would deal with parastatals, particularly their governance and management,” said Reuss, adding that government needs to cap the growing contingent liabilities. “We want to see reforms that enhance and underpin business confidence so we see a turnaround in investment,” he added.
From National Treasury, there can only be one direction: further fiscal consolidation until there is turnaround in revenue collections.
Reuss said risks remain to the downside, but Motata argued there was still reason to be optimistic.
He said many people in government have a clear understanding of the issues at hand and what needs to be done. While the state has clearly been found wanting on implementation, this can change very quickly (if the right candidate wins at the ANC’s December conference).