President Cyril Ramaphosa’s new administration must show a demonstrable commitment to structural reform if it is to stimulate the stagnating South African economy. After the initial euphoria of a change in leadership, the country now faces tough decisions and economic trade-offs if it hopes to start out on the path to sustainable growth.
Sovereign credit rating and outlook
S&P Global Ratings Managing Director for sub-Saharan Africa, Konrad Reuss told the GIBS Economic Outlook Conference that a number of structural issues behind the headlines could make it difficult for the new administration to put the economy on a more sustainable fiscal path.
South Africa’s low per capita income levels combined with tremendous developmental needs leave National Treasury with little fiscal flexibility. In addition, the debt burden has become unsustainable and critical, urgently-needed funds for education and healthcare are now tied up on debt servicing, he explained.
Because of the high Gini coefficient and entrenched inequality, it can be difficult to see the evidence of GDP growth. Past growth in South Africa’s economy had not led to any improvement in income distribution, he said.
“I am convinced that we will see high growth in South Africa again. But it must be more equitable and more inclusive,” Reuss said.
South Africa’s long-term foreign currency sovereign credit rating, which sits at a sub-investment grade of BB+ with a stable outlook, could come under further pressure if there is no improvement in governance, or “more of the same.” However, Reuss said there was room for upside potential if the country’s policy framework indicates much higher growth, and if fiscal problems are addressed in a meaningful way.
Commitment to structural reforms
Iraj Abedian, chairman and chief executive of Pan-African Investment and Research Services said government spending patterns must address underlying long term structural issues and not only aim provide short term relief.
South Africa Economist for Citibank Gina Schoeman said while she has upgraded her GDP forecast for South Africa to 1,5% in 2018 and 2% in 2019, in terms of real per capita GDP growth rates, this was “not good enough.”
“Most of the upturn will come from an improvement in confidence and a stable currency, which will result in lower inflation. However, from the second quarter of this year onwards, we will have to begin to look for structural growth as we have to expand the nominal income pie,” she explained.
Director and chief economist at Econometrix, Azar Jammine said the South African economy could grow by 3% in 2019, as a positive global environment contributes to an increased risk appetite for emerging market assets. “5% GDP growth will then be possible if we get the structural changes right,” he added.
In the past, South Africa had tried to embark on countercyclical spending to offset the effects of the global recession, “but the direction was wrong,” Jammine said. “The government should have spent on infrastructure projects to uplift the masses such as electricity, water, education or health instead of expanding the size of the public service.”
It would be necessary to embark on austerity measures, resulting in fairly deep short term pain in order to deal with the country’s underlying structural issues, Abedian said. “A considered Cabinet, which is wise and focused, would put a freeze on public wages and social welfare for three years. It will be painful, but not lethal,” he said. “We need to cut between 15 and 20% of the dead wood out of the public sector, starting with Cabinet.”
Budgetary priorities for the new administration should include efforts to stop wasteful expenditure at state owned enterprises and a reduction in the public sector wage bill. “We need government expenditure morality,” he said.
Abedian added that the country had been through “an existential situation’’ in the past year, as South Africa’s public finances were looted by a “sophisticated, intelligent syndicate.”
“I still believe we haven’t dealt with unwinding the extractive, predatory system which still stands to damage the economy. We can be enthusiastic that there is a ray of hope, but unless we take decisive action, that hope will evaporate.”
“All of us have a lot of work to do and we have a tough mountain to climb.”
Measures to regain investment grade rating
Returning South Africa’s long-term foreign currency sovereign credit rating to investment grade would require difficult policy choices, Reuss said. “Other countries which have returned to investment grade, so called Rising Stars, have shown us that it is largely dependent on the willingness of politicians to introduce policy measures and the willingness of the population to take pain.”
Reuss drew parallels between South Africa and Brazil, which was recently further downgraded to BB- with a stable outlook:
“South Africa is now experiencing the same euphoria around new leaders and a new administration, but it must prove that it can do better. All the right issues were put on the table at the State of the Nation Address. But it is not about the euphoria at the beginning, but the next three to four years of progress and meaningful regulations to correct the fiscal slippages and rising debt levels. It is in the hands of the policy makers.”