It is not often that the head of government of a relatively important country concurs with the International Monetary Fund (IMF) on the dire state and prospects of the economy of that country. This is exactly what happened when South Africa’s President Cyril Ramaphosa delivered his State of the Nation Address (SONA) in Parliament in Cape Town on 13 February 2020.
“Our country is facing a stark reality. Our economy has not grown at any meaningful rate for over a decade. Even as jobs are being created, the rate of unemployment is deepening. The recovery of our economy has stalled as persistent energy shortages have disrupted businesses and people’s lives.
“Several state-owned enterprises are in distress, and our public finances are under severe pressure. It is you, the people of South Africa, who carry this burden, confronted by rising living costs, unable to escape poverty, unable to realise your potential,” declared the President in a near cathartic tone.
Despite acknowledging the very poor performance of the economy, the President also, rightly, highlighted some of the signs of progress since the ANC came to power 26 years ago. These include there being 2.4m children in Early Childhood Development and pre-school today; 81% of learners passing matric in 2019, with an increasing proportion coming from rural and township schools; and so on.
But the country’s economic circumstances dictated that most of his address be confined to the rhetoric of aspiration in dealing with the country’s failing state-owned enterprises (SoEs).
This included the restructured electricity utility, ESKOM, which he confirmed will reluctantly continue load-shedding in the foreseeable future, as it sorts out “a decade of debt, lack of capacity and state capture”.
He also pledged to fix the economy to stimulate GDP growth, tourism, foreign direct investment (FDI), youth employment, land reforms and agri-business, and fighting gang-related crime.
IMF foreshadows address
Weeks earlier, in January 2020, the IMF had concluded its latest Article IV Consultation with South Africa. The commentary foreshadowed Ramaphosa’s address.
It said: “South Africa’s economic performance remains subdued, and risks are materialising. Weak private investment and productivity growth have dampened economic activity to levels insufficient to raise per-capita income and foster greater social inclusion.
“While the sophisticated services sector has been growing, most other sectors have been stagnant or contracting. South Africa thus remains an extremely unequal society, with high and rising unemployment (29 per cent), particularly among the youth.”
The crisis of youth unemployment could not be overstated. Government data confirms that of the 1.2m young people who enter the labour market each year, about two thirds remain outside of employment, education or training.
IMF data puts youth unemployment at 54%, “which is significantly higher than the average for emerging markets.” Similarly, according to the Fund, the country’s income distribution is heavily skewed towards the richest 20%.
On current policies, the IMF projects a lacklustre growth recovery from an estimated 0.4% in 2019 to 0.8% in 2020 and 1.5% in the outer years. Inflation is projected to rebound in 2020, from an estimated 4.2% in 2019, before easing to slightly below 5% in the medium term. The current account deficit is expected to widen to around 4% of GDP over the medium term.
Even the Finance Minister Tito Mboweni, in the National Treasury’s response, acknowledged the difficult juncture South Africa is at. The Treasury projects subdued short-term growth but expects a stronger recovery in confidence moving forward, resulting in GDP growth of 1.7% by 2022.
“The economic outlook,” stressed the Treasury, “is subject to risks, both domestic and external. Domestically, [a] failure to address governance and operational issues, specifically at SOEs, would continue to weigh negatively on the outlook. National Treasury is mindful of the fiscal risks that SOEs, particularly electricity utility Eskom and SAA, the national carrier, present to the fiscal framework.”
Mboweni acknowledges that the government has progressed in implementing many of the reforms to revive the economy; however, more urgency is required in the speed of implementation.
Competing factions paralyse action
Opposition critics, especially the Democratic Alliance, doubt President Ramaphosa’s commitment to reforms, growth and engagement with the private sector, as well as his government’s capacity to effect economic transformation, because of competing factions within the ruling ANC/South African Communist Party coalition.
They are more preoccupied with the spectre of the ANC’s proposed land reforms, especially the implications of the controversial expropriation without compensation (EWC), which Ramaphosa did not allude to in his address.
“EWC will have enormous consequences for South Africa, economically and financially, with asset values being affected across the board. Ordinary South Africans will be vulnerable to the most severe financial shocks and losses, and concern over the security of their investments is mounting. Institutions trusted by South Africans with their hard-earned investments and savings have an obligation to give honest answers to the vital questions on the effects of EWC on the wealth and financial hopes of millions of South Africans,” says Hermann Pretorius, of the independent think-tank, the Institute of Race Relations.
“Banks, insurers, and investments firms and similar institutions cannot sit on the sidelines while their clients are left to fend for themselves against a state bent on increasing its power at the expense of what people have earned through hard work,” he adds.
Others argue that the uncertainty over EWC will have a dampener effect on FDI inflows. The government will argue that it is attracting foreign investment and is already looking ahead to the third South Africa Investment Conference (SAIC) in November 2020.
President Ramaphosa reported that the country attracted investment commitments of R364bn ($24bn) from over 70 companies at the Second SAIC, in areas as diverse as advanced manufacturing, agro-processing, infrastructure, mining, services, tourism and hospitality.
“In the first two years of our ambitious investment drive, we have raised a total of R664bn in investment commitments, which is more than half of our five-year target of R1.2tn. Already, projects with an investment value of R9bn have been completed and 27 projects worth just over R250bn are in implementation phase, with more coming on-stream this year,” declared the President.
On the positive side, the IMF directors commended Mboweni’s handling of inflation and the country’s flexible exchange rate system. But they urge him to control public debt, rein in a burgeoning public wage bill, and sort out the SoEs, while at the same time acknowledging “the importance of protecting priority pro poor social spending and making education and health spending more efficient given high poverty and unemployment rates.”
The directors also commended the credibility and strong performance of the South African Reserve Bank (SARB) but warned that the its independence and inflation mandate should be preserved. They welcomed the resilience of the financial sector and called for continued vigilance, given the recent pick-up in unsecured lending.
The Fund also recommended that South Africa creates a conducive environment for private sector investment. One way of doing this is through the capital markets, not only in South Africa but elsewhere in the larger economies on the continent.