South Africa’s slide into a technical recession in the second quarter is a timely warning and reminder for the country to get its economy in order, failing which it will lose its only investment grade rating, says Business Unity South Africa CEO Tanya Cohen.
Moody’s Investors Service said in its March review of the country’s sovereign credit rating that a failure by the country to revive its economic fortunes would be a push factor for a downgrade.
The ratings agency set the clock to make a final determination on South Africa’s sovereign credit rating for 2019 immediately after the general elections around April.
Cohen noted that the deep 29.2% nosedive that the agriculture, forestry and fisheries sector took in the second quarter was symptomatic of the policy malaise that is characterised by lack of clarity and certainty, and it ultimately plunged the country into a technical recession.
“The decline starkly demonstrates that, in the absence of a coherent policy framework, businesses avoid risk, do not invest and grow, and certainly do not create jobs,” she averred.
Additionally, South Africa’s per capita gross domestic product has also been on a downward spiral and lagging behind its emerging market peers. “This means that citizens’ incomes have been declining and the trend shows no sign of abating.”
For a consumption-driven economy such as South Africa’s, that does not bode well, Cohen added.
Citadel chief economist and advisory partner Maarten Ackerman, meanwhile, averred that, if the drag from the agricultural industry were excluded from the figures, weak contributions from other industries would still have resulted in gross domestic product growth of a mere 0.1% in the second quarter.
“Despite this, it is somewhat positive to see that the mining, construction, electricity and financial industries all contributed positively to the economy over the past quarter, as these industries form the growth engines of the economy and hold the most potential for job creation,” he added.
On the expenditure side of the economy, Ackerman noted that spending on GDP declined by 0.9% quarter-on-quarter, although the weaker rand was able to support the export industry, which grew by 13.7% over the quarter.
Imports also increased by 3.1%, despite the fact that households have come under increasing financial pressure over the past few months.
“Of great concern, however, is the fact that quarter-on-quarter, annualised household expenditure figures decreased by 1.3%, reflecting the impact of the value-added tax increase, significant fuel price increases, high unemployment and low growth on consumers’ pockets.
“For a consumer-based economy, where households contribute upwards of 66% to economic growth, this movement is notably worrying,” he said.
Ackerman further pointed out that, worryingly, gross fixed capital formation growth was also negative at -0.5%, implying that no new investment is taking place in the economy.
Until investors have greater clarity on policy issues such as land redistribution and mining, he expects to see this number remain in negative territory.
ON THE UPSIDE
In the past few weeks, the government has gone on a drive to reinforce positive messaging around contentious policies such as land expropriation without compensation and given assurances that the policy will be implemented responsibly.
UK Prime Minister Theresa May, the International Monetary Fund and Chinese President Xi Jinping have all said they recognise the need for land reform in South Africa and urged the country to exercise due care when implementing the policy.
“We have also seen government start to signal that it may withdraw legislation that has been misconceived, rather than relentlessly pursue it through Parliament –Mineral Resources Minister Gwede Mantashe’s statement about the possible withdrawal of the Mineral and Petroleum Resources Development Amendment Bill is a case in point,” said Cohen.
The withdrawal of the expropriation Bill, pending conclusion of the Constitutional Review Committee, is another such example.
Business and government, as well as other social partners, have put their heads together and are engaged in serious conversations, debates and dialogues about how best to reverse the low-growth trend and fast-track initiatives to jumpstart the economy to generate growth and employment.
Confidence will be built through fiscal discipline and restraint; decisively tackling corruption; creating regulatory certainty and improving implementation through greater efficiency, alignment and coordination within the State.
Business expects these conversations to provide strategic direction, to result in meaningful action to stimulate investment and to generate renewed focus on creating conditions that are conducive for investment.
“There are, fortunately, still several pockets of strength in the economy, but it is clear that South Africa has greatly underestimated the economic damage of the past decade; how long it will realistically take to turn the economy around; and the negative impact of persistent levels of policy uncertainty – such as around issues like land reform,” commented North-West University Professor Raymond Parsons.
Boosting business and consumer confidence remains key if the country is to break out of the low-growth trap into which the recession has now pushed it.
Parsons said the emergence this year of an economic recession and lower expected growth prospects also have negative implications for the Medium Term Budget Policy Statement due next month, through their likely impact on tax revenues.
“There must be no renewed lapses in fiscal consolidation. These growth and fiscal developments will be critically monitored by the credit rating agencies when they again reassess the country’s investment rating towards the end of this year.
“When the Monetary Policy Committee meets later this month, it will need to leave interest rates unchanged again in view of the weak economy,” he noted.
Parsons concluded that, if South Africa is to recalibrate its messages to investors, there will need to be frank speaking by all participants at the investment summit, as well as more visible collaboration from key stakeholders on what has to be done.