What our bloated civil service costs us – Nedbank economist Nicky Weimar

Dare we begin stamping out corruption, start turning service delivery around (as in the Western Cape), create innovative upliftment partnerships of integrity and put the bloated civil service on an emergency banting diet? That would mean boosting our electricity generation capacity, which our politicians and energy executives believe is no longer a crisis – because government cannot ensure our taxes are spent effectively or honestly, resulting in a stagnated economy. In her economic overview below, Nedbank economist Nicky Weimar argues that were government to radically slim itself down, we could see the economy grow by up to 1.7% this year alone. Which ironically means getting out from under the Super-Tramp beach umbrella where the mantra is, “Crisis, what crisis?” and plugging the country back into an economically-commensurate energy supply. But that would mean first re-calibrating the entire machinery of government towards efficiency and service delivery instead of mostly benefitting a few politically connected individuals. We can but dream of an Arab spring – without the bullets, bombs and attendant human sacrifice. The real question is; can change come via the Constitutional Court and the ballot box? We have to pray it can. The billions cited in capital outflow if we’re relegated to economic junk status are too scary to contemplate. – Chris Bateman

By Carin Smith

Cape Town – The South African government has become too big for the size of the economy, Nedbank economist Nicky Weimar said on Thursday.

She gave an economic overview at the annual Nedbank Vinpro Information Day, which took place at the Cape Town International Convention Centre (CTICC).

“The government cannot support the economy. They can just try to manage debt and reduce the deficit,” she said.

Weimar explained that the deterioration of government finances has put an added strain on the economy, pushing up the country’s debt burden to close to 50% of the gross domestic product (GDP).

“SA’s woes are very much its own doing due to government’s ineffective spending, especially having expanded the civil service and paying above-inflation salaries instead of spending money on finishing power stations, for instance,” said Weimar.

“The world investment community has noticed that the SA government cannot support the economy. The country is, therefore, now at a critical junction where two major ratings agencies have us just one notch above junk status.”

Since about 40% of foreign investment in the country relates to long-tern retirement funds, which are not allowed to invest in junk status countries, about R600bn will flow out of SA if the country is downgraded to junk status.

“This will affect consumers’ ability to spend and business’ ability to operate. Government would have to find other sources of finance, which will be more volatile. So, ultimately government’s debt service bill will start to explode and it will have less money for social and economic priorities,” said Weimar.

“Confidence in SA has been hurt and created the perception among South Africans and in the global environment that government is split along two lines – one wanting to benefit a few politically connected individuals, while the other line wants to run state resources the way they should be done. The perception is that these two are at war, placing the state in continual paralyses.”

At the same time, she said SA can avoid a downgrade if government contains debt and cuts spending.

“The ANC has done that before. At one stage SA even had a small surplus. It can be done, but needs political will, strong political leadership and a single goal within broader government,” said Weimar.

Interest rates

If SA’s political environment proceeds in a more calm and controlled manner this year, if shockers like Nenegate and Gordhangate are avoided and if the country manages to maintain its sovereign risk rating, the rand will continue to trade up, although not at the same rate as last year, in Weimar’s view.

“The interest rate hiking cycle might have peaked and interest rates could start going down in the second half of 2017 and into 2018,” said Weimar.

“We believe the economy is getting slightly better and it could be the beginning of recovery. It depends, however, to some degree on good political behaviour. Maybe the SA economy could grow by about 1.4% if all goes well in 2017.”

The rand  

As for the rand, she said global forces could make the biggest impact.

“There are risk perceptions of emerging markets as a collective and with Donald Trump expected to boost the US economy, the dollar will strengthen. That could see interest rates increase in the US and capital moving there would be negative for the rand,” said Weimar. That is why she has what she calls a slightly negative view for the rand.

Other factors impacting the SA economy she mentioned include that the country is still very reliant on commodity prices and the impact of the drought.

Energy question mark

The evidence that the SA market is not working lies for her in the fact that the country continues to produce more and more unemployed people every year.

“Labour is the biggest cost element for most businesses and on top of that SA businesses have to deal with a lack of power generation capability. Yes, there was no load shedding in 2016 and some brag about it, but honestly, we did not test the system as the economy barely grew,” said Weimar.

“Therefore, the question remains: what if the economy accelerates? Will SA have enough power capacity to fuel growth of 3%, for instance? Most analysts agree that the country has too little power capacity for such a growth rate.” – Fin24

Source: http://www.fin24.com/Economy/govt-too-big-for-sa-economy-economist-20170119

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