Two percent growth into next year SA’s best case scenario – Azar Jammine

CAPE TOWN — Economic growth in South Africa won’t rise by more than two percent per annum this year and next. Sure, that’s an improvement on a rock-bottom base line, but it’s hardly enough to turn our economy around. When you balance it against population growth or people entering the job market, it doesn’t cover either. In this cogent analysis, Dr Azar Jammine, Director and Chief Economist of Econometrix, takes on those who attribute our improved economic performance solely to President Cyril Ramaphosa. While Ramaphosa has moved mountains in starting to clean out corruption and made bold economic moves, the recovery started long before him, Jammine asserts. Ramaphosa is constrained by real-politik, meaning his administration is still riddled with Zuptoids, be they in cabinet or lower levels. Jammine blames land expropriation without compensation for slowing down the recovery but says it should not distract from major underlying infrastructural challenges, such as education outcomes, labour relations, small business promotion and the red tape tying up potential investors. A stronger Ramaphosa mandate at the polls could start turning the ship around, he reckons. – Chris Bateman

By Azar Jammine*

Key points
  • Analysis of the first hundred days of President Cyril Ramaphosa as leader of the country yields an upbeat but constrained assessment.
  • Firstly, it should be recognised that the improvement in economic growth seen over the past year began long before Ramaphosa took over as president either of the ANC or of the country.
  • Secondly, it should also be recognised that his attempts at rooting out corruption and undertaking structural reforms to improve the economy are likely to take several months if not years to materialise. Political impediments to faster progress stand in Ramaphosa’s way. At least the business environment is more positive than it was last year.
  • Unfortunately, the issue of land expropriation without compensation which has begun to dominate the political economic discourse is likely to prevent investment from increasing to the extent that it might have done in a more positive business environment. Furthermore, the issue has drawn attention away from the underlying structural challenges that need to be confronted. These include improving educational outcomes, generating more congenial and effective relations between business and labour, reducing the concentration of power in the South African economy and promoting small business as a key employer through which unemployment can be more comprehensively addressed, undertaking large-scale infrastructural investment, and alleviating the regulatory burden of doing business in South Africa.
  • There is likely to be disappointment with the 1st qtr GDP data due to be released next week, but more generally, economic growth in 2018 is likely to be superior to that of 2017 and could improve further in 2019. Unfortunately, we are looking at growth rising to little more than 2% per annum, which barely covers the growth in population let alone the growth in the number of young people entering the job market. One can only hope that once the general election is out of the way next year, Ramaphosa might have the political freedom to address the structural impediments to higher economic growth more acutely.
Economic growth began improving before Ramaphosa took over

Amidst much analysis of the success or otherwise of Cyril Ramaphosa during his first hundred days as president, it is worth noting that economic growth began improving in 2017 long before Ramaphosa’s ascendancy to the leadership of the ANC and the country. GDP growth recovered moderately, to 1.3% in 2017, from 0.6% in 2016, even as business confidence was declining last year in the wake of two Cabinet reshuffles and a succession of credit ratings downgrades.

Cyril Spring. More of Zapiro’s magic available at www.zapiro.com.

Ramaphosa has in fact inherited an economy which had already entered an upswing phase due to factors unrelated to domestic political issues. Firstly, drought conditions in which the country had been immersed in 2016 disappeared, with the exception of the dry conditions in the Western Cape specifically. The recovery in agricultural output fed through into increased economic activity elsewhere. It also resulted in a decline in food commodity prices which contributed towards a steeper decline in inflation than had been anticipated.

Secondly, global economic conditions improved to their best levels since the global financial crisis, helping to boost prices of mineral commodities produced in South Africa. South Africa’s trade balance moved from a deficit to a surplus and this contributed towards a stronger currency.

The Rand also benefited significantly from the substantial increase in risk appetite for emerging market assets associated with the enhanced global economic environment and the favourable trend of commodity prices accompanying this. In turn, the 12% real depreciation of the Rand over the course of 2017 also made a huge contribution towards enhancing the decline in domestic inflation and paving the way for the first interest rate reduction in 24 months.

Growth in disposable income increased as a consequence and with this economic growth improved more generally. All this happened prior to Ramaphosa taking office as president.

Important steps undertaken by Ramaphosa to deal with corruption
Azar Jammine
Dr Azar Jammine is a leading South African economist.

Having established the marker that the economy began improving before Ramaphosa took over as president, one has to commend the president for acting swiftly in a number of areas to attack the ravages of corruption and state capture and improve the efficiency of government.

Most important amongst these measures was a Cabinet reshuffle that put competent ministers into key positions and which saw the elimination from the Cabinet of certain incompetent ministers and the redeployment of a few other ministers who were suspected of state capture into less important positions, with the possible exception of the Deputy President.

In particular, the appointment of Pravin Gordhan as Minister of Public Enterprises has hastened the reconstitution of most of the major state-owned enterprises as a precursor to improved governance and more efficient management in these organisations.

The appointment of former Finance Minister Nhlanhla Nene back into the leading position in the National Treasury has also raised expectations of enhanced fiscal rectitude and this in turn has allayed fears of further credit ratings downgrades. Just prior to Nene’s appointment, Ramaphosa held sufficient sway over the then Finance Minister Malusi Gigaba who delivered the 2018 Budget in compelling him to restore the three-year budgetary forecast to a more conservative and responsible dispensation, which would limit the increase in the public debt.

On the legal front, Ramaphosa rushed to install judicial processes aimed at bringing many suspected perpetrators of state capture to book, including various actions taken against former President Zuma.

From an economic perspective, Ramaphosa rushed to forge a better relationship between government and the business sector and re-engaged CEOs of large corporations to introduce initiatives aimed at employment creation and the development of small business activity.

His international escapades to drum up support for an improved image of South Africa as an attractive investment destination, will hopefully bear some fruit in due course.

Finally, Ramaphosa appointed a team of international investment envoys made up of leading South African businessmen, to help attract $100bn on such investment over the next five years. If he were to succeed in this venture, it would be a game-changer, adding 25% to current levels of fixed investment and helping to drive economic growth up to 5% per annum.

However, short-term progress in improving growth is quite limited

Unfortunately, it would be foolish to judge Ramaphosa at this early stage on the results of the actions he has taken thus far. In fact, a small element of Ramaphoria stands to evaporate next week with the publication of 1st qtr GDP figures which could well record that the economy actually contracted overall during that quarter, as indicated by us in a number of Ecobulletins on the subject.

There can be little doubt that some of the measures taken by Ramaphosa to restore decent governance are likely to take several months if not years to bear fruit. The tentacles of corruption have crept into every facet of state-owned enterprises. It is not going to be easy to extricate these in a hurry, no matter how good the intention and commitment to doing so.

Then there is the vexed question of land expropriation without compensation, which issue stands to scupper the ability of the country to attract investment more readily.

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Insignia of the ruling African National Congress (ANC)

It is clear that Ramaphosa intends dealing with the issue in a responsible manner. He went out of his way on being elected president to make the point that land redistribution which jeopardises food security, would generate spurious gains. He also went further to suggest that there was plenty of land in government and municipal hands already available for distribution on the basis of a more thorough research of how to do this. Ways of bringing about land expropriation without compensation without changing the constitution have also drawn attention more recently. Nonetheless, the superficial perceptions of interference in property rights are likely to inhibit faster levels of investment of the kind needed to accommodate the president’s desire to embark upon more rapid infrastructural investment.

Besides, his difficulty in restricting public sector remuneration and limiting the growth of government expenditure in such a way as to reduce the budget deficit, has forced him to preside over a sharp increase in VAT and personal taxation which is likely to inhibit economic growth.

It has also meant that the government has had to cut back on its proposed public sector capital investment projects to assist in not breaking the fiscus.

Need for massive structural reforms to improve sustainable growth

Unfortunately the focus on dealing with the land issue has also detracted from the attention of the Ramaphosa administration in dealing with other more fundamental economic structural weaknesses. Most important amongst these is that of education.

Ramaphosa is saddled with commitment to providing free tertiary education to poorer households, whilst at the same time real expenditure per pupil at government schools has declined by 40% over the past seven years. The imperative to improve basic educational outcomes has been sacrificed on the altar of satisfying the desires of populist University students and the politicians to whom they are closely aligned.

Then there is the issue of tense labour relations. The furore surrounding the introduction of minimum wage legislation and the discussions surrounding new public sector wage increases, has cut across attempts by Ramaphosa to forge a closer relationship between workers and employers.

There is also as yet no definite solution to drawing up a new Mining Charter that might encourage new investment projects into the sector.

Above all these factors, however, looms the realisation that the ANC is still heavily factionalised between supporters of ex-president Zuma and those trying to develop a new prosperous and effective regime under Ramaphosa.

Events in the North West, KwaZulu-Natal and the Free State have all shown that there is a significant pushback on attempts by Ramaphosa to clean up corruption and state capture within the government. It is likely that Ramaphosa will be denied the ability to lead without undue constraint until he achieves a significant victory for the ANC at the polls next year.

Ramapanther. More cartoon magic available at www.zapiro.com.

One’s hope in this regard is that once the election is out of the way and if the ANC receives a decent majority, we may be able to start seeing a more comprehensive implementation of the structural reforms to which Ramaphosa had alluded when presenting his New Deal in early December in anticipation of the ANC presidential election.

Others more cynical suggest that a comprehensive victory for the ANC at the polls next year will simply lead to more complacency and less action to overcome the structural impediments in the economy.

Whatever the course of political discourse over the coming year, the fact is that in the absence of addressing some of the structural reforms alluded to above, South Africa’s economy is doomed to achieve a maximum 2% growth rate.

At this level of economic growth, the country can barely accommodate the growth in the population and worse still, the growth in the number of new entrants into the labour market. Furthermore, such growth is woefully insufficient to help reduce the horrifically high unemployment rate in the longer term.

  • Dr Azar Jammine is the chief economist at Econometrix.