SA cannot afford to miss the opportunities offered by green shoots
By André Duvenage
Recently released economic data indicates that the economy is finally having green shoots.
The latest gross domestic product (GDP) figures show that the economy grew 4.6% in the first quarter of this year on an annualized basis, better than the South Reserve Bank’s revised forecast of 4.2%. African.
However, it is important to remember that this growth can be explained by a decline of 7% last year.
High commodity prices for platinum group metals and iron ore contributed to South Africa’s current account surplus, while a weak dollar helped strengthen the rand. Even though the agricultural sector contracted 3.2 percent on a seasonally adjusted and annualized quarterly basis, this should only be a temporary setback. The sector expects one of the best years on record in 2021, with the citrus industry expected to export a record 159 million boxes this year – up from 146 million boxes last year – and crops of wine grapes, corn and soybeans are all expected to be up this year.
Business confidence indices point to an encouraging upward trajectory. The business confidence index published by the South African Chamber of Commerce and Industry (Sacci) rose to 97 points in May, from 94.7 points the previous month, while the RMB business confidence index / BER of the second quarter shows an increase of 15 points, up 35 points in the first quarter.
President Cyril Ramaphosa’s recent announcement that the clearance threshold for on-board generation projects will drop from 1 megawatt (MW) to 100 MW over the next two months, once new regulations are issued, was a good news for a business sector that has been demanding that the threshold be increased for more than two years. The decision is expected to result in investments of R75 billion and potentially create more than 16,000 direct jobs.
Despite these positive indicators, the risks to the economy remain significant. The biggest challenge is to accelerate the rate of growth in a sustainable way that significantly reduces the debt burden of the country while allowing investments in capacity generation or GDP growth initiatives.
The biggest risk for the economy remains the Covid-19. The third wave of Covid-19 infections and with it a shift to higher levels of restrictions – including a ban on the sale of alcohol products, restriction of leisure travel in and out of the city Gauteng, and the fact that restaurants can now only serve take-out – is not economically ideal. It remains to be seen what the economic impact of these restrictions will be – or the impact on business confidence – but suffice it to say that South Africa cannot afford headwinds at this point. Questions must be asked about the reason for the freezing pace of the vaccine rollout and the impact it will have on the country’s recovery.
In the current environment, can South Africa translate recent green shoots into longer-term sustainable growth when much of the current recovery is being driven by consumption and prices rather than by fixed investment? One telling indicator is gross fixed capital formation – a measure of investment made – which fell 2.6 percent in the first quarter, while private sector investment contracted by almost 18 percent. .
The fall in fixed investment translates into an increase in unemployment. The country recorded the highest unemployment rate in a 13-year history of Statistics South Africa’s quarterly survey in the first quarter of this year, when unemployment figures rose 0.1% from the last quarter from last year to 32.6%. In the broad definition of unemployment, this is an even more alarming figure of 43 percent, while youth unemployment is a demoralizing 75 percent.
Even the agricultural sector, which is expected to grow this year, is losing jobs. Farm jobs fell 8% in the first quarter, the lowest since 2014, according to Statistics South Africa.
It’s important to remember that the issue of growth predates the Covid-19 pandemic, given that the economy has underperformed for more than a decade. While current economic indicators are encouraging, the current rebound is expected to slow to levels of 2% and below, as the country’s growth projections for the next two years are lower than those of the developed world and our countries. emerging market peers.
In the mining sector, it is likely that favorable winds in commodity prices will pass through to shareholders in the form of dividends instead of being reinvested in increasing supply capacity, which is problematic from a perspective. long-term growth. The sector continues to face a number of challenges that constrain growth, including political uncertainty, regulatory hurdles, and inefficient processing of mineral rights claims.
There is no doubt that over the past decade the South African mining sector has lost its competitive edge. Getting it back will require significant and far-reaching changes.
The benefits of on-board generation projects will start to be felt in about 18 months. Until then, the country will continue to be at the mercy of Eskom’s load-shedding schedule as the struggling power utility struggles to implement critical maintenance. In the medium term, as more and more companies begin to bring embedded generation projects online, Eskom risks losing some key customers. To mitigate these losses, we can expect larger tariff increases, which does not bode well for companies that still depend on the national grid for their energy needs. The expansion of credit to the private sector is slowing, indicating reduced demand. Demand in the housing market, which last year was partly fueled by low interest rates, appears to be waning, which is starting to have a negative impact on house prices.
The Sacci Business Activity Index, seen as a measure of sentiment about current conditions, fell from 49 points in April to 36 points in May.
A key element of Ramaphosa’s economic recovery plan is the delivery of new spectrum. A broadband spectrum auction, valued at R8 billion, was slated for March, but faced legal challenges almost from the start and was ultimately delayed by a court order after the process. spectrum auction was deemed illegal and irrational.
Another key element of the stimulus package was an infrastructure campaign proposal in which the government planned to leverage private sector investment. However, a lack of bankable projects and limited live projects means that too has not come to fruition.
South Africa cannot afford to miss the opportunities offered by green shoots. The current recovery is fragile. The key to transforming these green shoots into a dynamic of sustainable economic growth is to resolve the bottlenecks that hamper economic growth, creating an environment conducive to business and investment, a move away from the current interventionist approach of the government and ensuring that citizens are vaccinated as quickly as possible.
Andrew Duvenage is the Managing Director of NFB Private Wealth Management.
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