Key considerations

Economic recovery

Against the backdrop of a deep recession in 2020, South Africa is experiencing only a mild recovery, measured against other emerging nations. Growth is forecast to resume at 3% in 2021, lower than the OECD average of 3.30% and the Brics group – Brazil, Russia, India and South Africa – average of 6.70%. Economic expansion will plateau at about 2% in 2022 – well below what is needed to aid job creation (Minsat, 2021).

Owing to the combined effect of the 7% contraction in 2020 and lingering structural constraints to growth, South Africa’s real gross domestic product (GDP) is not expected to return to prepandemic levels before the latter part of 2023 (National Treasury, 2021).

A global economic rebound of 5.60% in 2021 and 4% in 2022 presents an opportunity for South Africa to “ride the global wave” of recovery (OECD, 2021). However, as a relatively small economy with a pre-Covid GDP of $351.40-billion, global integration will be key to taking advantage of opportunities that may emerge. Thus far, South Africa’s exports have failed to follow the ‘V-shape’ recovery of foreign demand, which highlights a potential issue with their competitiveness. There is, however, an opportunity to capitalise on intra-African exports.

Further, South Africa is among a few economies that have not achieved much in terms of economic prosperity in the past ten years and has been urged not to repeat the failures of the “lost decade”. Originally coined to refer to Japan between 1991 and 2000 – a time when the economy collapsed, stock markets crashed, and unemployment and debt soared – the term has come to be applied to a wider range of economies that experienced sustained periods of low, or negative, growth rates owing to political and economic policy failures. For example, warnings were issued by US President Barack Obama that the US risked a lost decade in the wake of the Great Recession of 2007-2009 (Meckler, 2009). In the South African context, President Cyril Ramaphosa in January 2019, spoke about South Africa’s “nine lost years” resulting from the State capture and related corrupt practices that gripped the country from 2009 to 2018.

While the per-capita GDP of many other developing nations accelerated, South Africa’s stagnated and now reflects the same level as 2006. Had the country managed to replicate its pre-global financial crisis growth over the past ten years, its per-capita GDP would have been R65 000, compared with the current R50 000 (Fengler, 2021).

Deindustrialisation and productivity

South Africa has suffered a major deindustrialisation pattern in the past three decades. Manufacturing as a percentage of GDP has declined from 21.60% of GDP in 1990, to less than 12% in 2019 (World Bank, 2021). Although certain sectors are performing well, most notably automotive, the overall industry has been underperforming by global standards. This analysis

Key considerations

is buttressed by the fact that total factor productivity – a crucial measure of efficiency in manufacturing – has declined in the past decade (Minsat, 2021).

The automotive industry is South Africa’s lead manufacturing sector. Its growth and success can be ascribed to the constructive cooperation that exists between industry and government. Government has adopted industrial polices to support the industry. The Motor Industry Development Plan started in 1995 and was replaced by the Automotive Production and Development Programme (APDP) in 2013. The South African Automotive Masterplan 2021 to 2035, alongside amendments to the APDP, take effect in mid-2021.

The APDP is a trade-related investment measure that uses import tariffs, rebate mechanisms, including a vehicle assembly allowance, a production incentive, as well as a cash grant in the form of the Automotive Investment Scheme to incentivise investment (Lamprecht, 2021).

Environmental challenges

South Africa faces many environmental challenges, the cost of which is directly affecting the country’s coffers. The welfare cost of premature death resulting from ambient particulate matter pollution is estimated to be about 5% of South Africa’s GDP. This is deemed excessively high, when compared with China’s 10%, given the disparity in levels of industrialisation.

Infrastructure bottlenecks

Infrastructure weaknesses in energy, rail and ports, are chokepoints for growth and productivity. The quality of South Africa’s infrastructure is relatively low, compared with other countries. This is underscored by the nation’s performance in the latest World Competitiveness Yearbook (WCY), which rates the ability of 63 industrialised and emerging economies to create and maintain an environment that empowers enterprises to generate value. South Africa’s ranking in 2020 fell three notches to 59 out of 63 countries rated. Of the four groups of criteria evaluated, South Africa’s weakest performance was in infrastructure, with its rating having dropped to 61 in 2020, from 60 in 2019 (Department of Employment and Labour, 2020).

Job losses and employment

South Africa’s economy lost 2.20-million jobs in the second quarter of 2020, a period marked by a hard lockdown to combat the spread of Covid-19 (Stats SA, 2020). Only about 40% of the jobs lost had been recovered by the end of the year. The job losses were most severe for those living in lower income households before the Covid-19 pandemic, with a heavy burden among low skilled and less educated workers.

Key considerations

At the end of 2020, South Africa had a labour force of 22.30-million, of which 15-million are employed and 7.20-million are unemployed. There are another 17-million who are not economically active, 2.90-million of whom are discouraged work-seekers (Stats SA, 2021).

South Africa’s working-age population is forecast to expand in the next decade, exceeding the dependent population (below 15 and above 64 years of age). This could yield a demographic dividend, although a growing workforce will need a growing economy. In the absence of economic expansion, the dividend could well convert to a liability.

Macroeconomic instability

For the first time since the advent of democracy in 1994, the World Bank has identified macroeconomic stability as one of South Africa’s top three challenges – the other being inequality and a lack of jobs. Although not considered to be at a “dangerous level”, the World Bank has flagged the issue as a worry (Fengler, 2021), echoing concerns raised by local economists.

The country’s fiscal position is weak, because of low growth and rising expenditures, which have not translated into better economic prospects. The budget deficit, at 14% of GDP in 2020/21, is at its highest ever and gross debt reached 80.30% of GDP in 2020/21 (National Treasury, 2021).

South Africa is not in a more vulnerable position owing largely to the strength of the country’s financial sector, which allows for a large degree of domestic borrowing. External borrowing remains at prudent levels, limiting the degree of currency risk.

The National Treasury presented two debt scenarios in the June 2020 Supplementary Budget. In the passive scenario, which is not deemed a viable option for South Africa and was presented for illustrative purposes only, debt will spiral upwards, exceeding 100% of GDP from 2022. The possibility that government will not be able to repay its debt leads to higher debt-service costs. This essentially redirects money that could be spent on health, education, and other policy priorities to local and overseas bondholders (National Treasury, 2020).

In the active scenario, government stabilises debt through a combination of reforms to boost economic growth and measures to increase revenue collection and lower expenditure. The deficit would be reduced strongly starting in 2021 and the debt level would start decreasing from a peak of 87% of GDP in 2023 (National Treasury, 2020).

The OECD has presented a third, progressive consolidation scenario where government fails to implement bold economic and fiscal reforms and the reduction of the deficit is only progressive. In this scenario, the debt level will stabilise by 2028. The progressive consolidation scenario is based on a deficit reduction of 1% a year of GDP and 2% GDP growth from 2025 (Minsat, 2021).

Key considerations

The National Treasury, in its 2021 Budget Review, announced a fiscal strategy to stabilise debt at 88.90% of GDP in 2025/26. Over time, this will reduce borrowing costs and the cost of capital (National Treasury, 2021).

Besides high debt-service costs, public-service compensation has also risen sharply. The average renumeration of public servants is high by international standards and compared with private-sector employees in South Africa. Government’s payroll costs have become increasingly unsustainable, driven largely by average increases of more than 3% a year above inflation for more than a decade (Intellidex, 2020). To safeguard public finances, Finance Minister Tito Mboweni has taken a hard stance with a proposed freeze on wage increases for 1.20-million public servants.

Indexing public-sector wages below inflation for three years (at inflation minus two percentage points) could generate about R30-billion in savings over three years. This measure, the OECD says, will have a limited real cost to civil servants as inflation has receded and given that they would still benefit from annual progression in the pay scale. Wage indexation should also be linked to productivity developments (Minsat, 2021).

Social spending

South Africa allocates substantial amounts each year to roll out its social welfare programme. The social grants programme, which is the main government instrument to reduce poverty and inequality, reaches more than 17-million beneficiaries and about half of all South African households (OECD, 2020).

The World Bank, however, warns that the social protection system cannot be a substitute for growth and jobs. The World Bank also argues that the social protection system is becoming unsustainable, owing to shrinking fiscal space (Fengler, 2021).

Meanwhile, high social spending must also be converted into better results. South Africa’s investment in health and education, as a percentage of GDP, is higher than that of Turkey, but its outcomes are worse (Fengler, 2021).