President Cyril Ramaphosa. Picture: GCIS
President Cyril Ramaphosa. Picture: GCIS

In considering the dire state of SA’s economy, it should be noted that, for a developing economy, the country is in some ways highly developed. Services dominate and manufacturing is just 13% of the economy. Agriculture, taking up 80% of our land mass, generates just 2% of GDP, yet it is an important employer.

Generally, unemployment in SA is endemic, shameful, and still rising. Broad unemployment, including those willing to work but who have given up trying to get employment, is more than 40%. GDP per capita, one of the better measures of a nation’s wealth, is just $6,000 in SA. This compares with about $65,000 in the US, $85,000 in Switzerland and $145,000 in Lichtenstein, the world’s richest nation.

GDP per capita is falling in SA. This is most unusual, and of concern. Public finances have been in disarray for many years, with debt to GDP now approaching 100%, or about R4-trillion of government debt (excluding state-owned entity debt of almost R1-trillion more). SA’s GDP performance vs the rest of the world paints a dreadful picture. We have grown substantially less that the rest of the world for the past 40 years.

One notable reason for it is the difficulty of doing business in SA. Combine that with rampant corruption and little to no trust in government, and private enterprise is crushed. Even easy wins such as tourism were squandered in the Zuma years. So with a stagnant economy, public finances in disarray, political sclerosis and seemingly no light at the end of the tunnel, surely when Covid-19 hit it spelt the last straw for the local economy?

It will certainly be a long road back to any kind of economic normality — public finances have been exhausted. Public sector wages remain high and take a disproportionate share of the tax take (51% of all taxes paid go to pay state employees). Public sector wage growth has hugely outstripped inflation, leading to a wage bill of north of R600bn. This is clearly a problem in its own right, but also has the effect that essential government capital expenditure is squeezed out. Add the woes at the SOEs, and we paint a bleak picture.

Depressing context

After two decades of investment status we are thus back, firmly, as junk. We are now staring down the barrel of a classic debt trap, in which the economy simply cannot grow fast enough to outstrip its annual interest payments. Foreigners have been selling, and now hold just 30% of our public debt.

SA sits alongside many countries with poor populations in that people reach out to strong leaders to lead them out of their hardship. Now is the time for President Cyril Ramaphosa to step into this void. People will then rise to him. If he can’t do this, someone else will. This is a depressing context, but are there any rays of hope?

Surprisingly, some measures of economic activity, such as electricity consumption, are already back to pre-crisis levels. There has been progress in a number of economic and political areas such as a new and more credible president and cabinet; solid leadership institutions — including the SA Revenue Service and National Treasury, as well as some SOEs; some acceleration in the fight against corruption; the debate about policy reform has started after the release of the Treasury’s economic plan; and most recently, the government gazetted the section 34 determination to procure additional new power from independent power producers, a significant step towards resolving the energy crisis.

There is much more to be done, but at least we know what we have to do; we just need the political will to do it. We still have many core strengths: a free press, robust judiciary, a well-financed banking system, fairly robust rule of law, strong governance and, on the whole, good physical infrastructure. Our public debt structure is also highly favourable. It is mostly locally denominated debt, held by locals. We also have one of the world’s longest-dated public debt books, with most government debt not needing to be rolled over for 10-30 years.

We have another opportunity. Inflation is now down close to 2%. We have to get nominal wages down in line (real wage growth can remain at 0.5%, just nominal wage growth of 2.5% not 6.5%). That way we can get SA competitive internationally again, and stop the eternal deprecation of the rand.

Overall, it is easy to say that SA looks sunk. It certainly feels that way. However, I believe we have a chance. It will require strong political will — so far somewhat lacking but showing some signs of strengthening — and strong leadership. We have a clear list of to-dos. However, we have a foundation on which to build. The entrepreneurial spirit of South Africans continues to astound me and, crucially, while our debt situation is poor, its structure allows us time to get through the challenges.

We have a golden opportunity to regain competitiveness if we can grasp the current low levels of inflation. Interest rates have been reduced substantially, the weak rand makes us more competitive, private enterprise wants to win and finance minister Tito Mboweni wants to put a leash on the public sector wage bill. With a little bit of that Mandela strength and tenacity, together we can make it.

• George is director of investments at Old Mutual Investment Group.


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