Green shoots are emerging in SA as the state and the private sector work together
If reforms show further signs of traction, and the government reaches an agreement on the public-sector wage bill, investor confidence will return
SA’s reform agenda is gaining traction at a time when investor sentiment towards emerging markets is improving. While risks remain, this could mark a turning point for an economy that has struggled to record meaningful growth since the global financial crisis more than a decade ago.
The Covid-19 crisis has taken a severe toll on the SA economy and labour market. Standard Bank expects GDP will contract 8.5% this year before partially recovering in 2021, with growth of 4.5%. The country will most likely only be back at 2019 output levels in 2023.
The jobs market faces a slightly longer recovery period — we believe it will take at least five years to recoup the roughly 1.5-million jobs that have been lost in the formal sector alone.
While Covid-19 has been a major setback, green shoots are emerging, and building blocks have been put in place to support a healthier long-term economic growth trajectory.
For one, government’s reform drive is taking shape. Significant progress has been made with regards to the rebuilding of key institutions such as the National Prosecuting Authority, the Hawks and Sars.
Second, the economic recovery plan presented by the president has the backing of a social compact. The consensus between the government, business and labour on the way forward gives the strategy legitimacy and paves the way for its implementation. The recognition that the private sector will need to play a key role in funding infrastructure projects and in driving the recovery plan is a step in the right direction.
There are already early signs that the infrastructure drive is materialising, with some notable road upgrade contracts having been awarded in recent weeks.
The private sector’s participation in the infrastructure programme will naturally be informed by expectations for aggregate demand. Encouragingly, there are a number of tailwinds that should support aggregate demand in the months and years ahead.
The imminent production and distribution of Covid-19 vaccines will also boost risk sentiment. We expect vaccines to be rolled out across the globe at a faster rate than many predict
Joe Biden’s victory in the US election is expected to yield a shift back towards multilateralism and more normalised international trade, with a strong focus on sustainability. The geopolitical landscape will likely become more predictable, and this should shore up investor confidence.
China’s resilience is another tailwind. With the coronavirus largely under control in the country, the world’s second-largest economy is performing well, and this will support commodity prices. As a commodity exporter, SA stands to benefit.
The imminent production and distribution of Covid-19 vaccines will also boost risk sentiment. We expect vaccines to be rolled out across the globe at a faster rate than many predict.
In the short term, however, some level of caution is likely to prevail as infection rates rise in many countries. But thanks to much-improved treatment methods and an adequately prepared healthcare system, we expect significantly lower fatality rates in SA and elsewhere. This means that economic restrictions are unlikely to be nearly as stringent as before.
The two biggest risks to SA’s recovery are the country’s fiscal position, with debt-to-GDP levels reaching uncomfortable levels; and its electricity supply challenges.
We are optimistic that the government and labour will ultimately reach an agreement on the public-sector wage bill, which is key to the National Treasury’s fiscal consolidation efforts.
At the same time, the Treasury has a solid track record in terms of its commitment to expenditure ceilings, with only minor infractions in recent years. This gives us confidence that the envisaged spending cuts will materialise.
We also believe that the worst is over when it comes to power outages. Despite the decline in electricity demand, 2020 has been the worst year on record in terms of blackouts. However, the new leadership team at Eskom is competent, and progress is being made in liberalising the energy sector and connecting new projects to the grid.
The recent ratings downgrades by Moody’s and Fitch were not unexpected, and investors are more focused on the reform agenda in any case. If reforms show further signs of traction, and the government manages to reach an amicable agreement on the public-sector wage bill, investor confidence will return, and the economic recovery could accelerate slightly.
There is already some evidence that foreign investors are looking more closely at SA as risk appetite increases. Domestic assets, particularly equities, are cheap in relative terms and offshore investors are testing the waters.
SA institutional investors, which have significantly reduced their exposure to local equities in recent years, would also add to their stock portfolios if confidence improves.
Overall, we believe that the economic recovery is showing early signs of traction as governance is bolstered and reforms advance. While SA faces a difficult and long road ahead, we are cautiously optimistic that the worst is now behind us.
• Ballim is chief economist at Standard Bank Group.
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