Last month South Africans were shocked to learn of a 51% quarter-on-quarter gross domestic product (GDP) decline. Whether you cite this number, or use the annualised figure of a 17% decline in GDP between Q2 in 2020 and 2019, the fact remains that South Africa Inc is struggling.
Uncertainty remains high and confidence remains low. In the near term, we wait on tenterhooks for direction from Finance Minister Tito Mboweni in this month’s Medium-Term Budget Policy Statement (MTBPS). We anticipate a budget deficit of 13.9% of GDP for 2020/21, and we look to the MTBPS for indications on how government plans to consolidate expenditure, narrow the budget deficit, contain debt and fix ailing state-owned enterprises, especially Eskom.
South Africa’s economy has grown in only three of the ten quarters that Ramaphosa has been president, highlighting the local economy’s structural weakness and emphasising that COVID-19 might be the catalyst of “second quarter economic collapse”, but it is not the cause. South Africa’s economic stresses and structural constraints have been laid bare by the pandemic, and the second quarter’s collapse in GDP has added to the pressure on President Ramaphosa and government to push ahead with long-awaited reforms.
While Ramaphosa has outlined the work being done by the State to promote economic growth the fact remains that some of the programmes making up Ramaphosa’s R500 billion stimulus package (intended to sustain individuals and businesses through the crisis) have been caught up in delays, technical difficulties and widespread allegations of corruption.
To boot, the R500 billion carried elements of “double counting”, such as the R130 billion in spending that was not stimulus but rather reprioritised expenditure, and R70 billion in tax relief that is deferral of obligations and not elimination. The stimulus thus makes for impressive policy pronouncements but poor impact.
Other constraints remain deep-rooted, including electricity supply challenges; persistent policy uncertainty surrounding the South African Reserve Bank (SARB) and land ownership; and the slow implementation of crucial reforms which hold back investor confidence and choke growth prospects. Consequently, Cannon Asset Managers has left our forecast unchanged of a 9.1% contraction in GDP for 2020.
In some good news, high frequency data releases in the third quarter – particularly the BETI index, domestic VAT receipts and Google activity data – point to recovery, even as electricity cuts push confidence even lower. The early data points to a third-quarter bounce in GDP of at least 50.0%, which is a long way ahead of the SARB’s 18.0% forecast. The small agricultural sector and the important mining sector could lead the way in this recovery, while other sectors including transport, finance and insurance are capable of quick recovery given their strong bases.
To borrow from former British Prime Minister Harold Wilson, a week in politics is a long time – and the same holds in the volatile economic environment that has gripped this year. We can only hope that October’s MTBPS marks a turning point in government’s response to the economic degradation and policy stagnation that have plagued South Africa for a decade. Time is no longer on our side.