SA has a growth problem. The latest example was encapsulated in this week’s third-quarter GDP figures: the economy contracted 0.6% from the previous quarter and 0.1% year on year.
The GDP numbers should prove a reality check after the buoyant political responses to second-quarter growth of 3.1%. That was off a low base and represented a return to normal after the disastrous first three months of the year, which were marked by a surprise return of load-shedding.
What should linger in our consciousness is that even at these anaemic GDP growth levels our energy grid is at its limit. Will we have the energy capacity if the economy grows beyond even the 1% mark? A question for another day, perhaps.
The growth problem points to the real possibility of a ratings downgrade, possibly as early as March, by Moody’s Investors Service, the only agency that has us holding on — by a single thread — to investment grade.
The third-quarter GDP numbers are therefore of great concern, especially since by most expectations the final three months of 2019 are not going to be much better. The economy is in essence sleepwalking its way towards judgment day. The current fiscal position is not sustainable and the pace of the reforms that have been introduced have been too sluggish to arrest the gradual slide in our GDP growth forecasts, which are fundamental to the ratings outlook.
That outlook depends fundamentally on two things: the government’s ability to control expenditure, particularly the public sector wage bill, and its ability to raise revenue. Given limited scope for tax increases, a growing economy is the only way to improve public sector revenue.
On the former, there has been a concerted effort by the Treasury to raise alarm about its constrained fiscal position, and that is to be welcomed. Earlier this week deputy finance minister David Masondo stressed the need for reforms ahead of the February budget and subsequent Moody’s review. He highlighted concerns about the public sector wage bill and further bailouts of troubled state-owned enterprises such as SAA.
It will be a Herculean task for the government to convince the ratings agencies and bondholders, among others, of its determination to change given that we are a mere two months away from the budget. But they and we shouldn’t think it impossible. To aid this Houdini-like task within the given time frame the state has to implement measures urgently to escape the low-growth trap we’ve been in for years.
Greater private sector investment has been the clarion call for some time, with some critics arguing that there is an investment strike. But if you comb through the poor growth numbers the one positive is that we’ve had two quarters of growth in private sector investment. The problem is that the rest of the economy is not picking up. That growth problem could be resolved by fully realising the growth potential of the private sector, especially small, medium, and micro enterprises (SMMEs), through the removal of pervasive red tape.
Investment pledges of R363bn at the recent investment summit, a 21% increase on the inaugural conference, is a brilliant start but we need to see more. We need job-intensive investment, an issue that was addressed on the last day of the summit. Initiatives such as the long-awaited launch of the government’s Biz Portal, which provides a one-stop shop for company registration, are positive steps.
Collaborative efforts among the Companies and Intellectual Property Commission, SA Revenue Service, Unemployment Insurance Fund, Compensation Fund, the B-BBEE Commission, the ZA Domain Name Authority and the big four banks have streamlined the company registration process and prospective business owners can now register their companies on a single platform in one day for as little as R175.
This will count in SA’s favour on ease-of-doing business scorecards, but for optimal efficiency to be realised structural drawbacks such as uncertainty from energy security must be resolved. The issue of spectrum has held the country back from fully benefiting from the fourth Industrial Revolution.
As much as the government under President Cyril Ramaphosa focuses on drawing investment into the country, it is in matters such as freeing up the private sector, and in particular SMMEs, where we’ll find shorter, quicker pathways to a better growth outlook for the economy.
To get business confidence to improve and companies to invest in expansion, the government needs to create an enabling environment. A more robust appetite for investment will help the government achieve its developmental goals, including sustainable employment creation. When it comes to batting off the pressure of ratings agencies, the state needs to support the Treasury in its attempts to strengthen our fiscal position.