Swift action needed to stop SA’s downward-growth spiral
ECONOMIC historians will judge very harshly President Zuma’s stewardship of the South African economy.
On his watch, economic growth has slowed to almost zero, unemployment has risen to record highs, and the indebtedness of government and the state-owned enterprises (SOEs) has soared. Corruption and blatant misuse of state resources is rampant. The largest SOE, Eskom, now stands on the brink of bankruptcy.
The most obviously negative judgment on the management of the ec
onomy under President Zuma has been that of the international agencies that rate countries’ creditworthiness.
At the start of President Zuma’s first term of office in 2009, South Africa was ranked three levels above “junk” by two of these agencies (Standard&Poors and Fitch), and four levels above “junk” by a third agency (Moody’s).
Today, the first two have dropped our creditworthiness to “junk”, while Moody’s has us one level above “junk” for our rand-denominated debt and has warned of a possible further downgrade.At the start of President Zuma’s first term of office in 2009, South Africa was ranked three levels above “junk” by two of these agencies (Standard&Poors and Fitch), and four levels above “junk” by a third agency (Moody’s).
Today, the first two have dropped our creditworthiness to “junk”, while Moody’s has us one level above “junk” for our rand-denominated debt and has warned of a possible further downgrade.
Our poor economic performance is ironic. When President Zuma was elected ANC president, the new leadership vowed to make improving the economy’s performance one of its principal objectives. They declared that the “neo-liberal” (market- and business-friendly) policies of former president Mbeki had failed to grow the economy and jobs fast enough.
They would change this, they claimed, through greater state intervention and direct state involvement in the economy.
Change it they did, but not as predicted. South Africa’s growth from 2009-2017 fell to an annual average of only 1.5% per year – slower than our population is increasing and less than half the 3.6% annual GDP growth recorded from 1994-2006.
>http://www.dispatchlive.co.za/news/2018/02/15/south-africa-new-president-thursday-afternoon/The weakness continues, with government’s own forecasts for little improvement by 2020.
President Zuma’s supporters argue that this poor economic performance is the result of global forces beyond their control. The start of his term of office, they argue, coincided with the severe slowdown in the global economy caused by the 2018 global financial crisis.
While this might have been true for the first few years, it is no longer valid. Growth in the world has been quite robust for the last few years, but in South Africa it slowed.
In its latest outlook for the world economy, the World Bank forecasts that Africa as a whole will grow by 3.3% in 2018 and the world economy will grow 3.1%. However, South Africa will grow just 1.1%.
We are lagging behind the pace of both global and continental growth.
As a consequence of this lack of growth, unemployment has risen to record highs.
Latest surveys show that 27.7% of South Africans (some 6.2 million people) are now officially unemployed. If the number of discouraged workers who have given up looking for work in an almost stagnant job market is included, unemployment rises to 36.8% (8.6 million).
Poor growth also meant that South Africa’s tax base stopped growing. Stagnant tax contributions have been compounded by the reduced ability of SARS to collect taxes owed because of the politically motivated loss of key personnel. National Treasury is now desperate to find ways to meet the R40-billion revenue shortfall revealed in the Medium-Term Budget.
>http://www.dispatchlive.co.za/news/politics/2018/02/15/jacob-zuma-teenage-freedom-fighter-anc-strongman/Balancing the national Budget has become more complicated because of the runaway wage bill of the vastly expanded civil service under Zuma. Daily media reports suggest state capture and looting of state and SOE coffers have added billions of rands to spending through bribes and kickbacks. This has cut into funds available for government spending on critical development and social needs.
And the hole in the national Budget has just got much bigger following the unplanned announcement by the president of free tertiary education for first-year students from households earning below R350000 per year.
Government has had to borrow increasingly large amounts to fund its excess spending. Government debt has risen from less than 25% of GDP in 2008 to 50% of GDP currently. The Medium-Term Budget projects it will rise to 61% of GDP in 2022.
In addition, government has guaranteed much of the debt of the struggling SOEs. Its overall liabilities rise to more than 80% of GDP when these guarantees are included. And with rising debt comes rising interest payments now totalling R163-billion this year, which is more than two-thirds of what government spends on basic education. And there is a rising risk should any of the SOEs default on their debt repayments.
This is what makes Eskom’s current financial woes so critically important. If Eskom defaults on its debt, government will have to step in to pay Eskom’s creditors on its behalf. If government cannot muster the necessary emergency funds, this will trigger further obligations for both government and all other SOEs to pay back existing borrowings. This they cannot afford, and so government would probably have to turn to the IMF and World Bank for help.
Such help would only be provided on stringent terms requiring government to make unpopular spending cuts and raise taxes.
Central to Eskom’s woes and those of other SOEs is poor management. SOE executives and directors allowed costs and graft to run out of control.
As the sole shareholder, it was government’s responsibility to bring the management of the SOEs to order before they crippled these key services, such as electricity and transport. Eskom has tried to tackle its problems by increasing the price of electricity fourfold since 2008. But the increase in cost has reduced electricity usage, so electricity demand in South Africa today is less than it was in 2008.
This means there is no need for the new power stations – Medupi and Kusile – that have cost so much to build.
Despite Eskom’s growing excess capacity and perilous finances, Zuma has led the call for very expensive nuclear power stations. Costs aside, changing technology and a growing shift to off-grid generation suggest we may in fact never need the additional electricity nuclear power is supposed to provide.
Zuma has left his successor to deal with the aftermath of his economic failings. This will not be easy. Re-igniting growth is key to future success. Only if the economy grows will taxes rise and jobs be created.
Fortunately, the improving global growth backdrop is supportive of higher future growth here. Commodity prices are rising in response to stronger global demand, which should help boost our exports. Private sector investment must also increase for faster growth to be sustainable.
Exports and private sector investment will increase only if investor confidence in South Africa’s future rises. The new leadership of the ANC is aware of the importance of building confidence to spur growth.
The strengthening of the rand and government bonds are encouraging signs of investors’ willingness to respond positively to better policies and improved economic management.
>http://www.dispatchlive.co.za/news/politics/2018/02/15/zuma-gone-political-parties-civil-groups-celebrate/Important steps have now been taken to improving the operating performances of the SOEs. Changes in their management will have to be followed by tough measures to restore operating efficiencies. Addressing SARS’ capacity to efficiently collect tax will provide greater fiscal certainty. While there is little scope to increase how much government spends, there is ample opportunity to refocus that spending where it is needed by reducing graft and wastage. This will free up funds for programmes to improve the quality and reach of critical social services.
The new leadership must act swiftly. There is still time to increase growth this year and lay the foundations for much faster growth and better economic performance in the future.
Gavin Keeton is with the economics department at Rhodes University