SA’s economic score shows modest improvement since August assessment

At the helm: The election of Cyril Ramaphosa as ANC president in December 2017 has helped boost confidence in SA, and if the global economy remains stable, investments will return to the country. Picture: GCIS
At the helm: The election of Cyril Ramaphosa as ANC president in December 2017 has helped boost confidence in SA, and if the global economy remains stable, investments will return to the country. Picture: GCIS

As SA tries to engineer an economic revival, improving the country’s growth rate is becoming increasingly critical, and hinges on revitalising components of the economy. Stanlib has compiled a list of 12 key indicators and scoring them on a monthly basis to assess whether SA is making meaningful progress towards an economic turnaround.

The ranking began in January following the election of Cyril Ramaphosa as ANC and national president, and the ensuing Ramaphoria.

The 12 indicators focus on variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.

September analysis

Taking into account the impact of the various key economic developments over the past month, SA’s economic turnaround score was a disappointing 45% in September 2018.

This compares with a score of 40% in August, 41% in July, 42% in June, 44% in May, 46% in April, 43% in March, 40% in February and 33% in January.

The score of 45% is consistent with the expectation of very modest economic growth in 2018, and is still disappointing relative to earlier expectations that the score would move steadily higher each month, rising convincingly to above 50% towards the end of 2018.

Hopefully the current economic stimulus and recovery plan will start to have a visible impact on economic sentiment and growth within the coming months.

How we score:

Every month, each indicator is scored on a scale of one to 10, with 10 indicating an extremely high level of vibrancy and one suggesting extreme under-performance.

The scores are then averaged across all 12 variables to derive the overall progress level (reflected as a percentage), which Stanlib analyses.

Picture: SUPPLIED/STANLIB
Picture: SUPPLIED/STANLIB

Are we on the right track?

Picture: SUPPLIED/STANLIB
Picture: SUPPLIED/STANLIB

Lifting SA’s growth rate to above 3% on a sustained basis will require significantly more effort than is evident, including the coordination of policy efforts across key government departments.

There is a risk that the consumer confidence index showed excessive optimism during Q1 2018.  

In Stanlib's view these challenges can be broken down into five main categories:

  • uplifting business confidence to stimulate private sector fixed investment;
  • restoring fiscal discipline and avoiding further credit rating downgrades;
  • reforming state-owned enterprises;
  • ensuring clear and consistent transformation policies; and 
  • reducing the extent of corruption in the private and public sectors.

Despite initial optimism that the political changes that occurred in December 2017 would quickly lead to signs of an economic revival, SA’s economic performance has been disappointing in the first half of 2018 and the economy has slipped into a technical recession.

While Stanlib is still forecasting positive GDP growth for 2018 as a whole, the rate of expansion is now expected to be less than 1%, which is well below the level of economic growth that would result in widespread job creation.

The Reserve Bank also recently revised down its SA gross domestic product forecast for 2018 from 1.2% to 0.7%.

More positively, Ramaphosa recently announced a new economic stimulus and recovery plan.

This initiative aims to stimulate economic growth and boost confidence in sectors affected by regulatory uncertainty and inconsistency.

The central element of the plan involves reprioritising about R50bn of government spending towards activities that have the greatest effect on economic growth, domestic demand and job creation.

his will be supported by the formation of an infrastructure development fund.

Specific reforms and initiatives include changes to SA's visa regime in an effort to boost the tourism sector; clarifying the Mining Charter to encourage investment and exploration in the mining sector; reducing the cost of doing business to boost exports and make South African industry more competitive; introducing measures to support black commercial farmers; and revitalising three regional and 26 township industrial parks as catalysts for broader economic and industrial development in townships and rural areas.

The latest growth initiative from the government also prioritises infrastructure spending as a key driver of economic activity.

More specifically, the government has decided to set up a South African infrastructure fund, inviting the private sector to enter into meaningful partnerships with the government.

Infrastructure expansion and maintenance can create jobs on a large scale, attract investment and lay the foundation for sustainable economic expansion.

The contribution from the fiscus towards the infrastructure fund over the medium-term expenditure framework period (three years) would be more than R400bn, which will be used to leverage additional resources from developmental finance institutions, multilateral development banks, and private lenders and investors.

The International Monetary Fund will not be approached to provide funding.

To ensure these funds are used effectively and that projects are completed on time and on budget, the government is establishing a dedicated infrastructure execution team in the Presidency with extensive project management and engineering expertise to assist with project design and oversee implementation.

Overall, the stimulus measures are to be applauded since there is an urgent need to lift the country’s rate of economic growth and boost business confidence. Furthermore, many of the growth initiatives identified are critical to the development of specific industries or sectors.

Unfortunately, from a macroeconomic perspective, most of the measures announced are relatively modest and unlikely to provide an immediate and significant boost to economic growth and employment.

This is the nature of stimulus packages that are based primarily on reprioritising government expenditure.

This does not suggest that the initiatives are unimportant, but rather that the focus will be on changing the priority of government spending to focus more directly on lifting economic growth and employment.

About the author: Kevin Lings, Stanlib chief economist. Picture: SUPPLIED
About the author: Kevin Lings, Stanlib chief economist. Picture: SUPPLIED

In contrast, the infrastructure fund has the potential to be a catalyst for additional private sector investment and job creation.

However, to make the infrastructure initiative effective, the government needs to urgently identify key infrastructure development projects, complete a feasibility and environmental impact assessment and then look to implement the projects as quickly as possible.

n the past, whenever the government has announced an ambitious infrastructural development programme, it has largely failed to focus on implementing the projects in a timeous and efficient manner that adheres to budgets and completion deadlines.

This lack of implementation has, over time, undermined the credibility of the government’s stimulus packages, thereby weakening business confidence.

Unfortunately, in the meantime, key components of the South African economy remain extremely weak.

In particular, there are more reports of companies retrenching staff, consumers are facing another significant increase in the petrol price, the rand remains volatile and weak, and the SA Reserve Bank is warning about possible interest rate increases if the rate of inflation moves closer to the top end of the inflation target.

Hopefully, Moody’s continues to rate SA as “investment grade” and the job and investment summits in October help clarify the policy environment, thereby lifting confidence.

To track SA's progress since the beginning of the year, visit Stanlib's Knowledge Centre.

 

This article was paid for by Stanlib.

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