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Picture: 123RF/MOOV STOCK
Picture: 123RF/MOOV STOCK

There was until recently a largely upbeat perception of SA’s fiscal position. Stronger commodity prices, thanks to a global economic rebound, led to higher tax revenue, giving the state fiscal space to manoeuvre its various obligations.

Robust demand and stimulus packages globally led to higher inflation, which translated into higher nominal GDP and improved our overall debt-to-GDP trajectory and fiscal position.

But heightened impetus and intervention from the state is needed to sustain the recovery. Changing conditions, such as lower commodity prices and lower global demand, may have a material adverse effect on SA’s economic performance and outlook.

The first hurdle to clear is lower commodity prices, which could lead to lower SA Revenue Service (Sars) revenue collection. Tax figures show that lower commodity prices are having an effect. This is made worse by energy and logistics constraints that lead to lower production and export volumes, key variables for GDP growth.

To resolve these issues Eskom and Transnet have to be the main drivers of a much-needed structural upturn. That said, one must acknowledge the economy’s growing embedded resilience as shown by recent data from Stats SA indicating stronger-than-expected manufacturing and mining output.

The global economy’s cyclical downturn, particularly among our major export partners, now threatens the performance of exports, export industry profitability and tax collection. Lower growth is now expected among developed markets, which implies scope for global consumption demand to dissipate. The US and Europe account for 34% of SA’s exports and a weak growth environment in those markets would be negative for demand for our exports and so for GDP growth.

We wait to see the extent to which economic stimulus in China can prop up the global economy and its relative effect on our economy. We have seen some promising early moves in this direction, such as the surprise decision by the People’s Bank of China to cut interest rates.

The second hurdle is high domestic interest rates, which may impede consumer demand. In the US personal consumption expenditure peaked before inflation peaked, which may imply that interest rates haven’t yet fully affected demand and filtered through the economy. The same is true for SA.

The main catalyst for improving domestic demand is through lower interest rates, which would increase consumer spending power. This would aid Sars by expanding the taxable revenue base as consumption picks up and companies increase revenues and profitability.

The third hurdle is how government funding is mostly prioritised towards noninvestment activities such as servicing debt, public sector wages and social assistance. Spending on infrastructure is lacking, which would enable the creation of jobs and create greater efficiencies in the SA economy. Policy reform has been equally slow. These are important levers to uplift and propel the SA economy.

Stagnant growth in SA is another concern. Using the debt-to-GDP formula, if nominal GDP remains fairly static and government debt continues to rise this will worsen our debt-to-GDP outlook and the recent adjustments to the debt-to-GDP trajectory may have to be revised upwards. This will be negative for the risk premium placed on SA, and ultimately the currency and bond market. One saving grace is that most of our debt is domestic (rand-denominated) debt, cushioning us to a certain extent from big swings in the currency and offshore interest rates.

Exogenous factors are set to influence the debt trajectory in 2023, which could take us to the edge of a fiscal cliff. State resolve and political will can help facilitate the interventions needed to boost consumption, production and export capacity.

Mazwai is investment strategist at Investec Wealth & Investment SA.

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