KEVIN LINGS: Green shoots for SA’s growth
There have been six positive developments that can be catalysts for an improved economy, if the authorities take advantage of them.
Prior to 2020, SA was already on a weak footing, both economically and socially. Unfortunately, the Covid-19 outbreak at the beginning of that year exacerbated the situation.
Despite the government’s efforts to limit the economic impact of the outbreak, such as introducing a R500bn fiscal relief package, the economy was brought suddenly to a near stop during the year. As a direct result of the Covid-19-related lockdowns, SA’s GDP contracted by about 7.2% in 2020, according to the 2021 budget speech presented by finance minister Tito Mboweni on February 24. The Stats SA “Labour Force Survey” for the fourth quarter of 2020 showed the official rate of unemployment had climbed to 32.5%.
Positively, however, as we enter a new year, SA finds itself in a rare but welcome position to benefit from six positive developments that it can use as catalysts for a better, more sustainable economic performance.
1. Global commodity prices are higher
In the second half of 2020, commodity prices rebounded quite strongly from the weakness in the first half. Metal and mineral prices ended the year well above their pre-pandemic levels, driven by rising demand from China.
The improvement in the global price of gold, platinum group metals and iron ore in 2020 resulted in an estimated 24% growth in the value of SA exports that year, despite the fall in production. This improvement has had a major effect on overall export performance. Higher commodity prices have benefited SA’s currency performance, trade balance and tax revenue collection.
While the outlook for 2021 remains uncertain and dependent on an effective global rollout of Covid-19 vaccines, commodity prices are expected to remain relatively elevated in 2021. The SA economy has an opportunity to continue to benefit from this trend.
2. SA’s trade and current account balance is moving into a surplus position
SA recorded a record trade surplus of R270.6bn in 2020, compared with a surplus of only R23.7bn in 2019. This has helped the balance on the current account switch from a sustained deficit to a surplus for the first time in decades.
Unfortunately, the growth was highly concentrated. If you exclude gold and platinum from the data, exports would have declined by R103bn, or roughly 0.5%, in 2020, resulting in a significantly reduced trade surplus.
It is critical that the authorities urgently start to implement a range of vital reforms of economic and industrial policy to help a broader base of manufactured exports achieve similar success, in a global environment that is likely to experience substantial growth in international trade over the next 24 months.
3. Domestic interest rates are historically low
Since March 2020, the SA Reserve Bank has progressively reduced the repurchase (repo) rate, cutting it by a total of 300 basis points to 3.5%, the lowest since it was introduced as a monetary policy tool. From our perspective, the policy response from the Bank has been entirely sensible, given global and local economic developments.
At the same time, not only has the inflation rate consistently surprised on the downside but the Bank has managed to get expectations anchored around the mid-point of the inflation target.
Both these developments mean that the Bank can afford to keep the repo rate low and steady for an extended period. This does not only bode well for overindebted consumers and businesses, it should also help boost domestic demand and spending, once the government has effectively rolled out the Covid-19 vaccine.
4. Tax revenue collection has improved
Recent tax collection data shows that gross tax revenue collection continued to show strong recovery, improving more than expected towards the end of the year.
The outperformance relative to the National Treasury’s estimates is a combination of three things: the National Treasury’s previous forecasts were conservative, there was a strong rebound in corporate income tax from robust mining sector revenues and the increase in job losses was concentrated among low-income earners, whose contribution to personal income tax is relatively small.
The rebound in tax collection gives the government additional funds that can be used for things like the procurement of vaccines.
5. Weekly government borrowing increased in 2020
In mid-2020, the government decided to increase the amount of debt on sale at its weekly auctions, to cover a rising budget deficit from the R500bn fiscal stimulus package and a fall in tax revenue collection. Since then, weekly bond auctions have been consistently oversubscribed, and government borrowing is now well ahead of budget.
The strong cash balance from the overfunding has given the government some extra flexibility to buy the required vaccines for the country; plug unexpected spending requirements like assisting state-owned enterprises; or fund future budget deficits, which would reduce future borrowing requirements.
6. Foreign investment into SA rose
Throughout 2020, foreigners systematically disinvested from SA. Foreign ownership of SA government bonds fell from a peak of over 42% in early 2018 to just under 29% in October 2020.
Positively, the trend seems to be reversing, with an increase in foreign investment since November. In November and December, foreigners bought SA government bonds for the first time since June.
Without regular foreign investment inflows, it will be near impossible for the country to fund a meaningful and prolonged economic upswing that includes substantial infrastructural development – partly because SA has an extremely low level of domestic savings.
SA needs to take advantage of these opportunities
It is critical for SA to capitalise on these opportunities, to create positive momentum so that the economy can start the process of recovery (in the short term) and prosperity (in the long term). However, to take advantage of the positive events that unfolded towards the end of 2020 fully, two things must happen.
First, SA must find a way to increase economic growth meaningfully. This means the government needs to start implementing at least part of its policy strategy. Second, to save lives, fully reopen the economy and release the pent-up demand in the economy, the government will need to distribute vaccines successfully.
If these two things are done in an environment in which global economic activity seems stronger, the economy will release some demand from consumers and businesses, improving confidence and setting SA firmly on a better growth path.
- Lings is chief economist at Stanlib
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