Economic Year in Review

feature / economic year in review

Claire Bisseker b i ss e ke rc @ f m .co. z a

he year 2021 started with SA in the

Tthroes of the second wave of the pandemic, which scuppered the summer tourism season and kneekicked things up a gear by lifting t he cap on energy self-generation from 10MW to 100MW, unleashing the prospect of billions of rands in green stake in SAA, and that the Transnet National Ports Authority would be corporatised, it even suggested the government was warming to the desirability of allowing greater private sector capped large parts of the hospitality sector.

So the mood was understandably grim when finance minister Tito Mboweni stood up in February to release what turned out to be his final national budget. It was remarkable for the strong resolve the National Treasury showed in sticking to its fiscal consolidation plan.

The only problem was that it relied on a three-year wage freeze to achieve most of the envisaged spending cuts. Nobody was surprised when the unions dug in their heels and the government ultimately wilted, granting workers an average increase of 6% for ROL L E R2021/2022.

The upshot was a R20.5bn overrun on the wage bill. But, thanks to an unexpectedly large R120bn revenue windfall, courtesy of COA ST E Rthe commodity boom, the extra amount could be absorbed —and the fiscus still looked better by the end of the year than expected. Previously, the Treasury was expecting the debt ratio to hit 81.9% of GDP this fiscal YEAR year and to stabilise at about 89% by 2025/2026. Now it is set to come in at just under 70% this year and stabilise at about 78% in five years.So debt is going to keep rising, but it’s still a substantial improvement.

In short, the cyclical uplift to SA’s revenue and growth prospects in 2021 provided by the commodity boom made both the fiscus and the economy appear much healthier on the surface. This allowed SA to sail through the May and November ratings agency reviews unscathed. However, neither Mo o dy ’s nor Fitch have removed their negative outlooks on the country.

Indeed, there were strong warnings, both fromthe ratings agencies and business in the first half of the year, that the pace of structural reform was still too slowand the cost of borrowing too highfor debt stability to be achieved over a five-year horizon, as the government has promised.

Business has become increasingly frustrated at the government’s failure to ease the cost of doing business. Its concerns were heightened when the country entered a severe third wave of the pandemic as winter set in and lockdown restrictions were ratcheted up to level 4. So it was a big surprise when, at the end of June, President Cyril Ramap ho s a energy investment. This, coupled with the robust firsthalf recovery driven by the commodity boom, transformed SA’s immediate fiscal and growth picture. Suddenly it was possible to imagine a future without load-shedding, where the debt ratio and S A’s credit risk were falling in tandem, and positive percapita growth was restored after years of steady decline. Taken together with the announcement that the private sector had been granted a majority participation in SA’s key network sectors. This is of crucial importance to the country’s longer-term sustainability, as S A’s costly, inefficient logistics system is one of the key impediments to growth. At the time, Bureau for Economic Research chief economist Hugo Pienaar described the move on self-generation as “a much-needed g a me - c h a nge r ”. The hope was that if it got the ball rolling on other stalled reforms and spurred If SA thought 2021 would be the year harsh lockdowns would end, it was sorely mistaken. The country’s economy and psyche have been dragged from euphoria to despair by the events of the past 12 months What it means: The commodity boom has made the economy appear much healthier, but SA’s inability to reform jeopardises its long-term sustainability 123 R F/ Ve c to r l a b

overall investment, SA would look back on this as the moment when the tide turned for the co u nt r y .

Buoyed by this tantalising prospect, the co u nt r y ’s economic narrative swung firmly into positive territory. Soon economists were falling over themselves to upgrade their 2021 real GDP growth forecasts from the 3%-4% range to about the 5% mark.

But before the constructive mood could gain a foothold, it all came crashing down in Julyin an orgy of looting and violence in KwaZulu-Natal and Gauteng. These events set back SA’s economic recovery, steepened the challenge of dealing with poverty, inequalityand unemployment, and completely undermined investor confidence.

“As ever, we take steps forwards as well as b a c kw a r d s ,”says Business Leadership SA CEO Busi Mavuso.

She believes 2021 will be remembered as the year in which the energy crisis reached its peak and SA began to win against the pandemic. But she fears the country isn’tdoing enough to turn the tide on rising unemployment which, at 34.9% in the third quarter, was SA’s highest on record.

Though the first decisive step was taken to end the energy crisis, Mavuso notes many other reforms haven’tyet been delivered. These include finalising spectrum auctions, fixing visa policies that make it hard for businesses to attract scarce skills, cutting red tape (from the detail of BEE regulation to exchange controls), liberalising Transnet to improve port and rail efficiencies, and kick-starting a major infrastructure programme by mobilising private sector funding.

Maiden budget: Enoch Godongwanadelivers his mid-term

budgeton November 11 Bloomberg/Dwayne Senior

Last week, in its annual report on the SA economy, the International Monetary Fund (IMF) expressed alarm at the lack of progress. It notes that the country’s economic rebound has not decreased unemployment because of anaemic private sector investment and deteriorating confidence, made worse by the July unrest.

It urges SA to tackle structural rigidities depressing investment, growthand job creation “i m me d i at e ly ”, and warns that “[without] de c i s iv e action to address obstacles to investment and reduce the government’s need to borrow, growth and employment will not pick up”.

By the time the bill for the July unrest was tallied in the November medium-term budget, it came to R37.9bn in additional state expenditure. A large part was to cover the extension of the R350 Covid social relief of distress (SRD) grant, which had expired in April, until March 2022. The unrest gave fresh impetus to a groundswell of opinion pushing for a basic income g r a nt . Given the devastation wrought by the pandemic, compounded by the unrest, the case for greater income support has never been more compelling.

Many argue SA should view extending welfare as a form of insurance to prevent anger and hunger boiling over and fuelling political extremism. Unfortunately, SA’s public finances have never been weaker. The option of raising further taxes from a shrinking tax base to pay for greater welfare for rising numbers of unemployed adults is patently unsustainable in the absence of rapid economic growth.

So, despite the near-term improvement in S A’s fiscal metrics, concern over lo nge r - t e r m fiscal sustainability has continued to mount.

In early August, Enoch Godong wana replaced Mboweni as finance minister in a long-awaited cabinet reshuffle. His first task was to preside over the medium-term budget policy statement (MTBPS), which was pushed out to mid-November to accommodate lo c a l government elections. The ANC’s election drubbing led some analysts to fear that this would weaken the Treasury’s fiscal resolve. On the contrary, the MTBPS sent out a strong signal that the Treasury remains wedded to fiscal consolidation and will resist populist pressure that distracts it from its goal of debt stabilisation. However, the budget is again subject to considerable implementation risk —it fails to allow for further bailouts of state-owned entities (SOEs), or for a big step-up in welfare spending, or for inflation-related salary increases for public servants. Yet all of these spending pressures are likely to materialise in the coming year. This highlights the contradictory nature of the fiscal path being pursued, with the Treasury still attempting to curb spending across the board while other parts of the government back a huge welfare spending push. “Critical to the fiscal path we have chosen is the need to be clear and unambiguous on the trade-offs we are willing to make as a nation,” said Godongwana in his budget speech. “We cannot have everything we want at the same time.” But this is precisely the lesson SA seems unable to learn. Politically, the SRD grant for S A’s unemployed adults looks impossible to roll back. However, if paid to all 16.8-million people w ho ’re eligible (and not just the 9.5-million currently approved) the cost would quickly swell from R40bn to R70bn a year. As ever, we And yet, as the MTBPS made clear, the pantake steps demic and the July unrest have virtually elimforwards as inated SA’s fiscal space. Meanwhile, fiscal risks well as have risen as the deterioration of many SOEs b a c kwa rd s and municipalities continues unabated. Busi Mavuso To crown a torrid year, load-shedding returned with a vengeance during the fourth quarter, making 2021 SA’s worst in terms of energy availability. And thenin early December the new Covid variant, Omicron, was detected in SA. In the ensuing panic, many countries curbed travel to the country, which wiped R1bn off the summer tourism season, severely denting the recovery. As the IMF report notes, the unfolding fourth wave has increased the downside risks to SA’s economic outlook. However, it still believest he country could sustain strong growth should the necessary reforms be undertaken. SA lives in hope that 2022 will be the year when that happens; it has certainly run out of options. x