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Silver lining to economic growth in 2018

Dr Roelof Botha, Adjunct faculty member, Gordon Institute of Business Science.

Dr Roelof Botha, Adjunct faculty member, Gordon Institute of Business Science.

South Africa currently finds itself in an unprecedented socio-economic situation in a post-democratic era. This makes identifying risks particularly difficult. Add to this the numerous pieces of legislation and regulations that need to be complied with and the achievement of a holistic compliance strategy seems impossible.

ITWeb Events spoke to Dr Roelof Botha, Adjunct faculty member, Gordon Institute of Business Science, and economist about his presentation at the ITWeb Governance, Risk and Compliance 2018 event at Summer Place, Hyde Park, on 20 February, titled: Economic prospects – in search of silver linings Or: The True State of the Nation.

ITWeb: Could you tell us a bit about the unprecedented socio-economic uncertainty that South Africa is currently facing in its post-democratic era?

Botha: There are a couple of points I would like to highlight here. Firstly, the mini-budget reflects a lethargic economy the reaction to the 2017 mini-budget was more vehement than usual, mainly due to the political and policy uncertainty caused by repeated cabinet reshuffles and mounting prima facie evidence of state capture in South Africa, which have eroded investor confidence. Traditionally, the mid-term budget is a fairly mundane event, allowing the minister of finance to reflect on the likelihood of reaching the budget targets for expenditure and revenue that were determined eight months earlier. Under most previous finance ministers, not much deviance was recorded from the forecast outcome of the full year's budget and media reaction was therefore rather muted.

Secondly, there is the huge revenue shortfall that we are dealing with. Since the startling revelations concerning state capture in general and the prevalence of mismanagement in the public sector at large (including huge losses and irregular expenditure), much has changed. The revenue forecasting capabilities of SA Revenue Services are clearly not up to scratch, and it has now transpired that a shortfall of more than R50 billion was expected during the fiscal year ending in February 2018.

The past decade has witnessed a dramatic reversal of fortunes for the performance of the key demand factors in the South African economy. During the decade between 1996 and 2006, GDP growth was mainly facilitated by strong increases in private sector capital formation and private consumption expenditure, with government expenditure firmly under control.

A decade later, with Mr Zuma at the helm of the country's executive leadership, government expenditure growth has outpaced that of all the other demand factors, with predictable negative consequences for fiscal stability.

A cursory analysis of the mini-budget and the subsequent market reaction confirm that the mishap with the revenue forecast represents the pivot upon which the immediate future of the country's fiscal stability hinges.

The bulk of the expert opinion from economists and the ratings agencies alike revolves around this revenue shortfall, as it affects several other key fiscal indicators, including the government's funding requirement and ultimately also the public debt/GDP ratio, which is expected to increase from its current level of marginally above 50% to 60% by 2021, a notable departure from the debt stabilisation objective outlined in February.

ITWeb: In your opinion, how have huge losses at state-owned enterprises, high interest rates, waning business confidence and a lengthy commodity price cycle downturn conspired to drag the country's economic growth rate into negative territory?

Botha: We have a global fiscal problem. It should nevertheless be pointed out that South Africa is not the only country in the world that has been battling with the negative effects of a rising public debt burden. The 2008/09 global recession has left its mark on the public finances in most countries, via slower taxation revenue growth.

Countries that have experienced an increase in their gross public debt/GDP ratios of more than ten percentage points over the past decade include Brazil, Mexico, the US, Australia, the UK, Japan and Egypt.

A second issue that escaped the attention of the prophets of doom is the fact that South Africa's gross public debt as a percentage of GDP still remains fairly low by international standards and is below that of countries like Singapore, the US, Brazil and India.

Unfortunately, South Africa's debt servicing cost as a ratio of total fiscal revenue is climbing and is well above the benchmark of just below 10% set by some international credit rating agencies for similarly rated peer countries. Ratings agencies have therefore predictably reacted with concern over the mini-budget, with Moody's Investor Services stating that the absence of fiscal consolidation was "credit negative".

The latter sentiment was echoed by other agencies and economists and it begs the question as to whether National Treasury could not have been more creative in preparing a mini-budget that includes concrete suggestions for getting out of the current mess.

ITWeb: What is your current view of the South African economic situation?

Botha: I feel that solutions are at hand. Fiscal consolidation could have incorporated some combination of the following:

  • A marginal reduction of government expenditures via temporary freezes on new appointments in non-critical positions and more competitive procurement procedures.
  • An increase in the VAT rate to 15%, which is still low by international standards and does not compromise equity objectives (due to the zero-rating of expenditure items closely associated with the spending patterns of low-income households).
  • Pragmatic measures to improve the corporate governance at state-owned enterprises (SOEs), including trimming the number of directors, privatisation (in some instances) and subsuming some of the SOEs into functional directorates at government departments.
  • Substantial deregulation of economic activity, including a temporary stay of BEE policies, designed to stimulate capital formation, economic growth and employment creation over the short to medium term.
  • Provision of more policy certainty, particularly in the primary sectors, combined with protection to local manufacturers, who continue to be threatened by cheap Chinese imports where labour protocols are ignored.

The upshot of this potential positive effect on tax revenue is that it would have reduced the deficit/GDP ratio from its latest forecast level of 4.2% to only 1.8%, which would almost certainly have satisfied the ratings agencies and more or less guaranteed the maintenance of investment status for South Africa's rand-denominated bonds.

Even a 50% success rate with the implementation of these recommended fiscal reforms would yield a deficit/GDP ratio of 3%, which is widely regarded as a sound benchmark and is the theoretical norm for membership of the European Union.

It is a pity that measures such as these have apparently not been considered or discussed within National Treasury or the country's executive leadership, who seem to be pre-occupied with other matters or simply do not fully grasp the severity of the current fiscal dilemma.

There are some silver linings. Despite the regression of public sector efficiency over the past decade, economic growth may surprise on the upside in 2018, due to a number of silver linings.

During the first half of 2017, visitors to South Africa from overseas increased by 11% over the first six months of 2016 to reach a new all-time record high of 1.3 million people, outperforming global tourism growth by a healthy margin.

The recovery of metal and mineral prices and record harvests in the country's summer rainfall regions have led to a remarkable recovery of the primary sectors of the economy.

Furthermore, most of South Africa's key trading partners are experiencing improved economic conditions, which is good news for our exporters.

In the event of the imminent new political leadership of the governing party embarking on more business-friendly policies and substituting radical economic transformation with radical economic growth, the future socio-economic environment could improve substantially from 2018 onwards.


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