Encouraged by the green shoots of economic recovery at home in the first half of 2021, South Africa’s President Cyril Ramaphosa could not resist turning into a salesman at the G7 Summit in the Cornish resort of Carbis Bay in June, which he attended as a guest of the British Prime Minister, Boris Johnson.
His delegation sang the praises of a strong rand, rising commodity prices – including gold steadying at $1,882 per ounce in early June – a record trade surplus, and steady output growth in mining, financial services and manufacturing.
“Gatherings such as the G7,” Ramaphosa stated, “are an opportunity to promote our country as a destination in which to invest and do business, and as a partner for development.”
Ramaphosa is convinced that his government’s economic recovery and reconstruction policies are starting to bear “tangible results to resolve challenges that have long hindered our economic growth”.
This is not surprising given that his current mantra is “optimism is the foundation of progress, and hope is the companion of development.”
The catch is that the current upswing is a cyclical blip created by a perfect storm of a strong currency – therefore, cheaper imports, and high commodity prices – before a reversion to the norm because of weak underlying economic fundamentals and painstakingly slow structural reforms. The risks of further Covid-related restrictions persist.
First the ‘good’ news and then the reality check. S&P and Fitch Ratings both affirmed South Africa’s long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’ in May, albeit still below investment grade but avoiding a downgrade.
Stats South Africa confirmed that GDP increased at an annualised rate of 4.6% for Q1 2021, boosted by a robust contribution from the mining sector of 18.1%, and from finance, real estate and business of 7.4%. This growth trajectory is expected to continue through to Q2 2021.
A positive surprise
That the South African economy is “recovering from the sharp contraction of 7.0% last year” is not in doubt. S&P and Fitch expect growth of 4.3% in 2021 and 2.5% in 2022.
The uplift, they concur, is cyclical and driven by a significantly stronger global economic environment and improving terms of trade from higher commodity prices.
Jan Friederich, Head of Middle East and Africa Sovereign Ratings at Fitch Ratings, admits that the South African economy’s strong revenue performance so far in 2021 “certainly has been a positive surprise.
“It remains to be seen whether restructuring at SARS (the South African Revenue Service) will improve revenue collection. Continued strong commodity prices would be a support for growth and, by extension, public finances,” he adds.
The strengthening in gold prices and lower imports contributed to a current account surplus of 2.2% of GDP.
Fitch expects the current account to record a small surplus of 0.4% of GDP in 2021 and return to a slight deficit in 2022 because of higher imports as the recovery starts to take effect.
“We assume some of the revenue outperformance will carry over to subsequent years and expect the consolidated government deficit to decline from our estimate of 13% of GDP in FY20/21 to 8.8% in FY21/22 and 6.8% in FY22/23,” added Fitch Ratings.
The IMF contends that finance minister Tito Mboweni is faced with a policymaker’s trilemma – meeting increased spending needs; containing public debt; and mobilising more tax revenues.
This is where the reality check sets in. Ramaphosa acknowledges that “it is understandable that citizens may be frustrated by the slow pace of change, and feel that our problems seem intractable. Our high rate of unemployment has not improved since the global financial crisis and was worsened by the pandemic.”
Mboweni, too, lamented in the parliamentary debate on the Budget vote that “the government is aware that it needs to fast-track growth-enhancing strategies and the implementation of critical reforms that raise economic growth and improve fiscal sustainability.”
So what are the immediate economic priorities for Team Ramaphosa? To Fitch’s Friederich, the urgent challenge is debt stabilisation.
“A failure to check the rise in debt could, at some stage, become destabilising. Controlling public sector wages is an important part of the government’s strategy to contain deficits. An acceleration of trend growth would certainly help reduce risks of debt rising to unsustainable levels,” he says.
South Africa’s public debt structure is largely domestic and in long maturities. This is tempered by the strong fiscal revenue, which stood at 2.8% of GDP above the government’s own forecast, and 0.7% of GDP above the February 2021 budget projection.
“We expect general government debt to rise from 82.5% of GDP in FY20/21 to 87.1% in FY22/23. This is significantly lower than our previous forecast of 94.8% in FY22/23,” says Friederich.
Cosatu, the trade union federation, public sector unions and the National Union of Mineworkers (NUM) are all demanding above-inflation pay rises – the public sector unions, 7% and the NUM, 15%.
This excludes a motley of allowances – some bordering on wage inflation lunacy and economically unsustainable. Negotiations are deadlocked, with the threat of strikes looming.
The country’s jobless rate increased from 30.8% in Q3 to 32.5% in Q4 2020, which according to Stats SA is “the highest rate since 2008”. The International Labour Organisation estimates South Africa’s rate at 55.75% in 2020. Local organisations put this at 75% – the highest youth jobless rate in the world.
The IMF maintains that reining in the public sector wage bill and avoiding ill-targeted subsidies to inefficient state enterprises are essential “to reduce South Africa’s fiscal deficit and to stabilise debt over the next five years and return the public finances to a sustainable position.”
Perpetual governance deficit
Curbing the public sector wage bill will be politically challenging, especially when nationwide local elections are scheduled for October this year. The ANC may think they have enough of a feel-good factor, but there has been talk about postponing the elections should there be a third wave of pandemic paralysis.
The problem is that the ANC seems to be entrenched in a perpetual governance deficit. Ex-President Jacob Zuma is on trial for corruption and has been jailed for contempt of court. Health Minister Dr Zweli Mkhize is on “special leave” after admitting to “irregularities” relating to a R150m ($10.53m) contract given by his ministry to Digital Vibes, which was allegedly grossly overpriced.
Erstwhile ANC Secretary-General Ace Magashule is suspended following criminal charges relating to fraud when he was the premier of Free State. The list is endless. Ramaphosa’s anti-corruption drive seems to progress one step forward only to be undermined by a never-ending flow of new corruption and state capture allegations.
Rooting out corruption, respect for the rule of law, violence against women, and exceptional income inequality are social and governance indicators dragging down the country’s international reputation and sovereign ratings.
The ‘redemption’ is that South Africa has a medium World Bank Governance Indicators (WBGI) ranking at the 58th percentile, “reflecting relatively strong institutions and well-entrenched democratic processes, although the recent period of state capture has raised questions whether these strengths are over-stated.”
Ramaphosa maintains that “we are making progress in resolving many of our challenges, from corruption to energy shortages to obstacles that discourage investment. We do not take the patience and resilience of the South African people for granted. We acknowledge our shortcomings as a government and are working to remedy them.”
The ultimate judge of that would be the South African electorate at October’s local elections and the next general election in 2024.