President Jacob Zuma celebrates with his supporters after he survived a no-confidence motion in Parliament in Cape Town on August 8, 2017. Picture: REUTERS
President Jacob Zuma celebrates with his supporters after he survived a no-confidence motion in Parliament in Cape Town on August 8, 2017. Picture: REUTERS

After a shaky 2016, South Africa's economy was set for a recovery this year. The first quarter was always going to be weak, but better commodity prices were supposed to boost investment. Add in higher consumer confidence, and in early March I thought 2017 growth could get to 1.8%. What a difference four months make. On March 30, President Jacob Zuma reshuffled his cabinet. While the reaction of the rand was more muted than anyone expected, the destruction he wrought is becoming increasingly visible.

Next month StatsSA is likely to report that the economy grew by around 1.5% to 2% in the second quarter. At first glance this suggests my diatribe against the cabinet reshuffle is unfounded, but let us not be fooled. The statistical bounce was driven by bumper farm harvests and will not be sustained.

Construction and retail activity remain weak. The latest unemployment data showed that 113000 people lost their jobs in the second quarter. Job losses occurred in the construction, household, transport and communication, mining and agriculture sectors. Excluding agriculture, 73000 jobs were lost. While the farm losses were likely seasonal, the loss of confidence in the regulatory environment no doubt drove the job shedding in the construction, private household and transport sectors.

Mosebenzi Zwane. Picture: GCIS
Mosebenzi Zwane. Picture: GCIS

Regulatory uncertainty has choked the mining sector this year. Despite the rise in commodity prices, Minister of Mineral Resources Mosebenzi Zwane, with his approach to regulation, has ensured that this sector will not be investing in 2017. Instead, the sector is planning closures that put 20000 jobs at risk. The manufacturing purchasing managers' index dropped to 42.9 in July - its lowest level since 2009 - as manufacturing production contracted by 2.3% in the 12 months to June this year.

Weak growth is feeding into lower revenue. South African Revenue Service commissioner Tom Moyane recently conceded that revenues will disappoint this year. Revenues are sharply lower than the February budget forecast - no doubt exacerbated by SARS personnel issues. At the current run rate, the shortfall could be as high as R40-billion.

South Africa's interest bill is also rising. The government will need to borrow a further R191-billion this year, with state entities borrowing a further R66-billion. This debt will cost 0.75% more in interest than if it had been issued on March 27 2017. The increase in interest on this new debt alone in the next 12 months amounts to R2.3-billion - which could have been better spent on infrastructure, education or housing.

Let's summarise the key points. To date, the cabinet reshuffle has resulted in:

  • Significant job losses of around 73000;
  • A contraction in fixed investment;
  • An anaemic growth outlook of 0.5%;
  • A potential revenue shortfall of up to R40-billion;
  • An increase in borrowing costs of R2.3-billion; and
  • A cash crunch for several state-owned companies that are struggling to raise commercial funding.

Without a dramatic change of direction by January, further credit rating downgrades will follow. This will exacerbate the problems, but a credit rating is a scorecard, not a root cause. The root causes are lousy policies and low confidence levels. As long as the ANC focuses on its internal political battle (seemingly to the death), there will be no restoration in confidence. No one is focused on keeping the economy alive while they jockey for survival.

Moola is co-head of fixed income at Investec Asset Management

Please sign in or register to comment.