Kevin Lings, Chief Economist at Stanlib, spoke to BizNews about the budget presented in Parliament last week. He notes that the the SA economy is expected to have contracted by around 7.2% in 2020, its worst annual performance since at least 1960. Closing the gap between South Africa’s current trend growth rate, and a modest target of 3% on a sustained basis is going to require a significantly larger implementation effort than is currently evident. All South Africa’s international credit ratings are now below investment grade. The key driver behind the rating downgrades was the further expected weakening in SA’s fiscal strength over the medium term. While South Africa is not the only country to have been severely affected by the crisis, its capacity to mitigate the shock over the medium term is regarded as lower than that of many sovereigns given significant fiscal, economic and social constraints and rising borrowing costs, he says. – Jackie Cameron
Kevin Lings on South Africa’s fiscal position:
The fiscal position has deteriorated very substantially in the last year, and obviously, it was weakening in the years leading up to that. South Africa finds itself at a debt level that is 80% of GDP. If you think back in 2009, we had a government debt level that was 26% of GDP, so that’s a massive deterioration. Obviously, the pace of deterioration – more recently – has been a concern.
Back in October last year, the Minister of Finance indicated that he thought the debt level would go up to 95% of GDP, before it started to peak out. In the budget that he presented, he’s now saying that because of the fiscal discipline measures they’re hoping to introduce, they can top out in terms of government debt at 89%. Slightly better than what we expected just four months ago. Obviously, it remains to be seen whether we can implement those types of fiscal reforms.
When you consider that the biggest part of that fiscal reform is trying to ensure that salary increases for the public sector are 0% for the next three years. Obviously, that can prove to be extremely challenging in an environment where you have a very active public sector trade union. But let’s assume that it is achieved, then I think that we have for the moment, averted an imminent fiscal crisis. On balance, I would say the risks remain and it’s all about whether or not we can actually implement the types of policy measures that the minister outlined.
On trimming the number of civil servants:
I think ideally he should have been more proactive, but even capping the salaries at zero is going to be a challenge. I’ve got no doubt that the trade unions will oppose that. We have a real risk that you end up with a very substantial public sector strike, which can be quite debilitating for government. I think he was trying to do as much as he can.
I think, overall, there’s no doubt that government spends a huge amount on salaries and that we’ve got to find a way to curtail that. There’s also no doubt that in within the state-owned enterprises, there’s an additional huge salary cost that ultimately has to be dealt with. Clearly there’s a huge amount of wasteful expenditure that is still going on.
I think that there’s a lot that government can do to rein all of that in. I guess from their perspective, they have to balance that with their political objectives and their support base. I think just getting the salary increases pegged at zero for the next three years is going to be a very substantial challenge.
On Covid-19 vaccinations:
Obviously, it’s heartening that we have now started to procure some vaccines and are starting to distribute that. But if I look at the start of that process, at the current pace, it would take us 20 years in order to reach two thirds of the population. We’ve got to find a way to ramp that up very dramatically – both in terms of sourcing additional vaccines and then critically administering those vaccines effectively.
So there’s a huge amount of work that has to still take place. We are factoring – in terms of our forecast and the expectation – that we’ll have a third wave of infections as we head into our winter season. We anticipate it picking up in around May and into June/July. We do think that we’ll go into further lockdown restrictions at that point. Hopefully it is not as severe as the second wave, but we factored that into our expectation
Then hopefully we start to make more progress in the second half of the year. But it seems clear to me that South Africa is only going to reach population immunity next year and then perhaps start to open up the economy more fully. I would say that in the coming months, it remains a significant obstacle and obviously a hindrance to the outcome of the budget – because clearly the minister is hoping for a rebound in growth, hoping for a pickup in tax revenue. The longer that takes, the more he’s going to have to revise this year and then subsequent budget outcomes. So, it’s a significant risk.
The electricity difficulty remains a huge obstacle to investment – particularly obviously domestic investment. foreign investors would also be put off by the fact that you don’t have a consistent electricity supply. ultimately, it is probably the single biggest factor limiting South Africa’s growth dynamic over the next year or two years, depending on how long it persists. I think there is a bit more progress being made, in terms of trying to allow the private sector into the electricity space. Over time, we are hopeful that the private sector will be able to participate more and therefore contribute more to the electricity solution.
But before that happens, there are a couple of key concerns. The one is that there’s no doubt that Eskom, financially, remains under very substantial pressure. They’ve got to spend a huge amount on maintenance. The maintenance programme still has to continue at a very high pace and that we are going to have intermittent load shedding. Also, there are a significant number of failing power stations. At any point, South Africa could have a more significant power outage. I just don’t see how that changes in the short-term – by that I mean during the course of the next year.
On expropriation without compensation:
It still continues in the background. It didn’t feature at all in national budget. It’s certainly not a factor that features in any of the economic forecasts in a meaningful way. I guess a lot of that depends on exactly what has changed. What is the wording of any change in terms of the legislation, particularly in terms of the Expropriation Act? Is there really an effort to try to change the Constitution? It does appear that that’s going to be less likely, and I think it’s about the spirit of that change.
What is government hoping to achieve? They continue to insist that this is not about trying to annex people’s farms and people’s households, but simply trying to free up available land more easily – particularly land that municipalities and government itself owns. Land that the state-owned enterprises own. I think that until it’s real, until it’s legislation and until we see the dynamic of this, it’s going to remain a significant overhang and therefore significant concern.
It’s one of those areas that we keep telling government they’ve got to clarify policy. There’s a range of issues where we just keep saying there’s policy uncertainty. I would put land as part of that, the procurement of energy, a lot of regulation on the ease of doing business, on mining rights – there’s a whole lot of areas that are critical for government to resolve, in terms of their policy agenda. Unfortunately, we still end up in this limbo environment. We continue to flag it as a risk, but I guess we’ll only really know when we see the actual legislative change.