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It is time for a proper, sustained recovery 

Johannesburg, 26 October 2022 - If the saying that “desperate times call for desperate measures” is true, then it must remain true that tough times call for bold, courageous, and creative measures – exactly what is needed from the Medium-Term Budget Policy Statement (MTBPS) this week.

First and foremost, the finance minister needs to address the country’s poor economic outlook.  

Investment in emerging markets is about the balance between growth and risk. Without growth, there is only risk. This is the real challenge South Africa faces, wherein pro-growth (political) rhetoric does not translate into substantive economic progress and one that the minister has an opportunity
to address.

The headwinds facing the global economic outlook are on the rise, a fact confirmed by the International Monetary Fund (IMF) having reduced its 2022 GDP growth forecast for South Africa to 2,1% from the 2,3% forecast in July and for next year - the GDP growth slows to 1,1% from the July forecast of 1,4%.  South Africa’s growth outlook is amongst the weakest of all emerging markets.

This weaker outlook reflects load shedding, policy implementation inertia, slower trading partner growth, tighter financial and monetary conditions, and a negative shift in the commodity terms of trade. South Africa’s structural unemployment is tragically a constant cause for concern, with the IMF expecting the unemployment rate to rise to 34,6% this year, from 34,2% last year’ and then to rise again to 35,6% next year.

If the South African government is serious about driving growth, it needs to start thinking, and acting, outside its ideological boxes. Liberalisation, freeing of the labour market, embracing foreign and local talent, structural reform, embracing rather than blocking technological change and a renewed push toward regional integration will all catalyse growth. The market’s trust that the Treasury already enjoys will gladly underpin this.

The President’s energy plan, announced earlier this year, offered hope for a resolution of South Africa’s short to medium term energy supply challenges. The plan includes new agreements with neighbouring countries for the import of electricity and the enlisting of Independent Power Producers to plug gaps in the grid. It also aims to encourage households to go solar and sell excess power to the grid.  Little further detail on the plan has beenmade available, with even less details on its implementation. The MTBPS is a good opportunity to spell out the intricacies thereof.

Eskom’s debt is the biggest issue that the minister must address.  Publicly available information suggests that Eskom’s debt servicing costs exceed its operating profit, a clearly unsustainable scenario. Government needs to address the matter in a way that frees cash flow for Eskom to address its immediate operational challenges.

Another elephant in the room, come Wednesday, will be the cost-of-living
crisis caused by rising energy, food and fuel prices. These come amidst rising interest rates and less income for households, according to the Quarterly
Employment Survey. It is safe to say that of the 3 million jobs that were lost
due to the National Lockdown, not all have been recovered.

When the pandemic struck two years ago, government responded with a R 500 billion stimulus package, R 70 billion of which was in tax measures. A case can be made to again introduce tax measures to offer consumers relief and one of the ways to do this is to extend the Social Distress Relief (SDR) grant beyond March next year, with the view to making it permanent. Government’s
own research shows that the fiscus can afford this  - which would offer some relief in these tough economic times.

Recently described by one business leader as being “glacial” in pace, one of the most puzzling, frustrating and frankly disappointing aspects of South Africa’s economic performance has been the lack of adequate infrastructure spending. Despite launching the Sustainable Infrastructure Development Symposium (SIDS) and gazetting R 320 billion worth of infrastructure projects in July 2020, very little has happened by way of implementation, and therefore spending. Infrastructure spending has shielded the economy from the worst effects
of previous economic crises and can again help carry SA through the current or
pending downturn. However, spending, not just planning, is required for this to
happen.

It would be interesting to see how healthcare spending is being calibrated away from the response to the COVID-19 pandemic to responding to other health emergencies (e.g., HIV/ Aids and TB) as well as South Africa’s burden of disease (including trauma and lifestyle diseases). The implementation of the National Health Insurance (NHI), hastened by the pandemic, would also be important.

During November this year in Egypt, where much of the world will gather for the Conference of Parties (Cop 27), South Africa has to present a framework of how it intends to spend the $ 8,5 billion aimed at achieving a Just Transition and pledged at Cop 26.  Albeit the work is carried out through the Presidential Climate Finance Task Team and a framework recently approved by cabinet, the MTBPS seems like a good opportunity to show government’s thinking, bearing in mind that the transition must be just in an economy that was built on coal.

It’s time for a proper recovery. Fourteen years ago this month, former finance Minister Trevor Manuel returned from the IMF to report a coming storm in the global economy. The market jitters that had been present since 2007 culminated in the collapse of Lehman Brothers in September 2008,  sparking the Global Financial Crisis. Manuel used the room created by South Africa’s healthy public finances and good banking regulation to maintain infrastructure spend, boost public confidence, and shield the economy from the worst of the Great Recession.

South Africa never truly recovered from the crisis. That was until the pandemic struck, forcing SA into a debt funded, low growth recovery plan with much needed economic reforms delayed. Much of what has passed for an attempt at recovery, including the latest Economic Reconstruction and Recovery Plan, has either been inadequate or not properly implemented.

It is now time for a proper and sustained recovery, and the MTBPS is a good place to start.

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