Is South Africa settling for stability instead of growth?: Katzenellenbogen

Key topics:Markets improve, but economic growth remains very low.High debt, wage bill and weak SOEs strain public finances.Unemployment above 31% as deep reforms remain limited..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Jonathan Katzenellenbogen*.Finance Minister Enoch Godongwana will deliver his budget speech this afternoon against a background of improved financial-market confidence in the country and talk by big bosses and President Cyril Ramaphosa of a turnaround.In recent months the rand has strengthened and the yield on government bonds has dropped, allowing the state to reduce borrowing costs. Inflation is close to the three-percent target, which is significant for an emerging-market economy. Commodity prices have had a good run, giving the economy a boost and helping to raise tax revenue. And we are off the Financial Action Task Force’s grey list over suspicions of being a conduit for dubious transactions connected to terrorist financing and money laundering.“Load shedding” is mostly a thing of the past, although the water crisis is almost nationwide and there are no signs of immediate relief. Bottlenecks on SA’s rail network and at its ports remain unresolved.The Reserve Bank’s adoption of a lower inflation target of three percent has given a big boost to market confidence. Hitting this target means that our inflation rate is about the same as that in the UK.That is all good news. Listen to President Cyril Ramaphosa and some big-business bosses and you might be convinced that SA has turned the corner and strong economic growth lies ahead..Read more:.Ramaphosa’s GNU plan to focus on economic growth and infrastructure reform.“We have not experienced the excitement and the promise of rapid growth for almost twenty years, but we are on the cusp of achieving it now,” said Ramaphosa during the debate on his State of the Nation Address (SONA) in Parliament last week.For all this aplomb, there is no talk of even three or even five percent economic growth.Pathetically lowIf indeed SA has turned the corner, why is the country’s growth rate still pathetically low, and why are no big boosts to the economy expected in the next few years? In 2024, SA grew by just 0.6 percent, and last year the International Monetary Fund (IMF), in its annual report on the SA economy, said it expects the country to have grown by only 1.3 percent. That is very slightly below the population growth rate, which means we are pretty much stagnant. On a per-capita GDP basis we have been in long decline. This year the Fund expects growth of only 1.6 percent, and over the medium term it is projecting growth of around 1.8 percent.If we are on this upswing, why is unemployment, at more than 31 percent, still astronomically high compared with other emerging markets?Improvements in the growth and unemployment rates probably lag other indicators, but nevertheless the problem is that the real economy faces burdensome regulations, poorly managed state-owned enterprises and a low level of confidence.Even with the improvements, government finances remain under pressure. Debt levels are far too high. If the Minister of Finance, Enoch Godongwana, surprises the markets with measures to really reduce the debt-to-GDP ratio, SA’s turnaround would be a lot more convincing, but this is difficult to achieve. Last November the debt-to-GDP ratio was around 78 percent, and some economists predict it could come down to below 77 percent in the budget presented today.A tax-revenue overrun and lower borrowing costs with the drop in bond yields will help. In its baseline scenario the IMF expects debt as a percentage of GDP to continue to grow, reaching nearly 87 percent in less than ten years. Our debt as a share of GDP is way over the average emerging-market (excluding China) debt-to-GDP ratio, which is around 60 percent.Public-sector wage billDebt-servicing costs take up 20 percent of revenue and restrict the space for growth-boosting spending such as infrastructure. Another problem is that the public-sector wage bill, which has been rising for the past twenty years, makes up about a third of public spending and consumes about 40 percent of total revenue. Addressing wage growth and overall staffing levels in the public sector is politically difficult.There were massive increases in hiring during the Zuma era. For the same level of qualifications, the public-sector wage premium over levels paid by the private sector is close to 50 percent. Procurement remains a big problem area and is in need of a major overhaul.These are all part of the ANC patronage problem.To boost the economy, Ramaphosa’s reform programme Operation Vulindlela is insufficient and has been very slow. It mostly aims at attempting to turn around Eskom, Transnet and the water sector. Independent power producers are taking on a far bigger role, and the private sector will be able to run certain rail corridors, but that is pretty much it. That might be privatisation by stealth, but a more ambitious programme to end state control is required to boost growth.The state-owned enterprises are a mess and a burden on productivity and the economy. Trying to turn this round is a lost cause, and meanwhile their inefficiencies mean they cannot adequately invest and help grow the economy. The remedy adopted by many countries is privatisation, but not in SA.“Strategic national assets”Ramaphosa ruled out privatisation during the debate on SONA last week. “Let us be clear, we are retaining public ownership of our strategic national assets,” he said.The other big drag on the economy is empowerment policies. Trying to fill positions on the basis of national racial demographics in a country where there are critical skills shortages and shifting needs is an economic drag. Running private and state procurement systems on the basis of racial preference has resulted in a heavy cost penalty.But there is no chance of reform of this. Once more in the SONA debate, Ramaphosa ruled out any changes, portraying empowerment policies as key to fighting injustice. “They (the critics of empowerment policies) say we must get rid of broad-based economic empowerment, falsely claiming that it inhibits economic growth, falsely claiming that it enables corruption.”.Read more:. Finance chief Godongwana outlines fiscal limits, reforms to SA’s GNU.The IMF disagrees and, in its most recent report on the SA economy, calls for a review of empowerment and preferential policies “to ensure that their social objectives are met without hindering business dynamism and job creation.”Big economic crisisThe ANC might be able to get a few extra percentage points in growth from its stabilisation and limited reform efforts. That could satisfy the cadres, as it means they would not face hard political opposition and might just be able to avoid a big economic crisis.But that does mean continued low growth and high unemployment, and the risk of a crisis..*Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Katzenellenbogen has also worked on Business Day and as a TV and radio reporter and newsreader. He has a Master's degree in International Relations from the Fletcher School of Law and Diplomacy at Tufts University and an MBA from the MIT Sloan School of Management..This article was first published by Daily Friend and is republished with permission.

Is South Africa settling for stability instead of growth?: Katzenellenbogen

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