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SOUTH AFRICAN ECONOMIC PROSPECTS 2020

Caught in the Middle

Compiled by Richard Downing, Economist

Limited human capital and savings (capital – local or abroad), and the inevitable presence of entrepreneurs, severely impact the potential of the South African economy to perform better, grow, and create employment that could improve the wealth of citizens. From figure 1 below, it is evident that economic growth in South Africa has dwindled to levels below one percent.

Given the prolonged period for which this low growth has been recorded, it places doubts on the growth potential going forward. There are various structural challenges posed by this low potential growth. It has, therefore, become paramount that structural impediments to growth be removed for the growth potential to be improved. The trend line for growth has become the norm or potential for growth.

FIGURE 1

The global recession that came about in 2007/08 had a notable effect on the South African economy, but apart from these exogenous developments, much of the current structural problems manifest themselves as endogenous structural challenges that cover a wide array of economic policy matters. The projected growth rate of 0.5% for 2019, and slightly higher in 2020, demonstrates the doldrums the economy finds itself in at present.

Although some economists opt for a short-term pump-prime approach that increases government spending and monetary easing to remedy the economic problems, there is no fiscal space to serve as a panacea for the fiscal trap South Africa finds itself in in the medium to longer-term. South Africa is battling with a supply problem and not merely limited demand. With a high import propensity (more than 30% of domestic expenditure gets imported), excess domestic demand caused by monetary easing will quickly find its way to increased imports and thus rising balance of payment (BoP) deficits and a weaker currency with mounting inflationary consequences.

THE SUPPLY SIDE

The latest data that was released on the performance of the economy and its main sectors paints a gloomy picture of the supply side of the economy. Table 1 shows that economic growth declined from an already subdued performance of 1.4% in 2017 to 0.8% in 2018 and probably below ½% in 2019. According to the IMF’s October 2019 World Economic Outlook, the prospects for 2020 and even the medium-term up to 2024, is not rosy – growth varying between nil and 1.5%. The October 2019 medium-term budget policy statement (MTBPS) did not resolve the issues related to the constrained fiscal and government debt situation but confirmed the severity of the situation. The outlook for employment also remains depressed with the result that households will remain under the yoke of debt servicing and tight personal budgets in the next two to three years.

TABLE 1

The IMF Article IV statement, released after the regular annual IMF staff visit, mentions the already known problems relative to state-owned enterprises, fiscal deficits, and low economic growth. The IMF proposes that the ultimate goal should be to expedite structural reform that could continuously enhance private investment and participation. Although the Treasury has anticipated a five percentage point reduction in government expenditure over the next three years, this may not suffice. The fiscal adjustment should “mainly be expenditure-based” with support from increased revenue with SARS’s improving tax administration.

According to the IMF, the low interest rates around the world at present might help to enable South Africa to continue to service its debt. The risk, however, is that this situation may breed a sense of complacency and that low global interest rates could change quickly, and then South Africa might be in an awkward situation – worse than at present.

SECTOR PROSPECTS FOR 2020

Latest Sector Investment Patterns

Figure 2 indicates the investment patterns in the main sectors of the economy. From 2010 to 2018 the most positive changes in real (physical) fixed investment of a 1.5% average per year took place in the tertiary sector (transport 2.8%, community services 2.2%), 1.3% in the secondary sector (electricity 2.1%, manufacturing 0.9%), and 0.6% in the primary sector (agriculture 2.7%, mining 0.7%). Not really inspiring for longer-term economic growth.

The recent fixed investment trends mirror the shorter view of investor confidence (2016 to 2018 and 2019) and suggest that the primary sector was the sector that recorded the largest increase (7.8%) in real fixed investment between 2016 and 2018, with mining increasing by 10.7%.

FIGURE 2

THE DEMAND SIDE

Trends in Demand Aggregates

Real household (1.6% on average for 2018/19), and government consumption expenditure (1.7% on average for 2018/19) are still increasing, but albeit at a slow rate. Export volumes grew slower (1.9% on average for 2018/19), while real gross domestic investment declined (minus 1.5% on average for 2018/19). Households and government battled to service high debt levels while employment and tax revenue shortfalls exacerbate their financial positions.

Owing to a lack of international competitiveness, South African exports find it hard to penetrate export markets except for some commodities. The further breakdown of law and order and ongoing criminal activity is smothering the tourist potential. The result is that export volumes (goods and services) are under severe pressure and cannot enhance or drive economic performance or benefit from comparative advantages.

GENERAL ECONOMIC PROSPECTS

The above background sets a depressing perspective on the economy, but it should be remembered that by approaching the business environment strategically, one can avert the negative outcome of the aggregate and seek for opportunities on the opposite of the general trend. Table 2 gives the prospects for important economic indicators for the short-term i.e. 2020/21, and medium-term 2024/25.

It is assumed that the government will adhere to the essential structural economic adjustments and that the economy will gain positive traction over the medium-term. Although 2020 will be a year of painful adjustments that have already begun (year-end 2019), the outcome should be more positive towards 2024.

TABLE 2

* Please note that these Prospects present a review of the current situation and probable outcomes for 2020 and therefore does not present advice.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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