The South African economy is currently in a deep downturn, with Covid-19 compounding an already-weak underlying economic picture. To discuss in more detail the state of the economy, the key challenges facing the government and the economic outlook, we spoke to Annabel Bishop, Chief Economist at Investec.
Annabel Bishop joined Investec in 2001, and has worked in the macroeconomic, risk, financial market and econometric fields for around 25 years. Annabel is the holder of the Sake/ Beeld Economist of the Year title for 2010, has won numerous monthly Reuters Econometer and FocusEconomics awards, and has authored a wide range of in-house and external articles, published both abroad and in South Africa.
FocusEconomics: The government is now easing lockdown measures. How quickly do you expect economic activity to recover, and do you see lasting damage to the economy?
AB: Alert level three is currently in operation. Under level three most businesses have been allowed to operate, with certain restrictions and requirements. However, a number of businesses chose not to partially re-open, even when the restrictions allowed them to do so, as it would not have been profitable or there were other reasons too damaging to their performance. This will limit the scope and pace of the economic recovery. Furthermore, a number of businesses have permanently closed in South Africa, which will limit the speed at which South Africa can recover from the lockdown induced by Covid-19. Our economic forecasts have worsened primarily due to a much slower recovery in economic activity than previously expected. In addition, many structural weaknesses remain, or are worsening. The return to the level of economic activity experienced at the end of 2019 is only anticipated by the end of 2025 in real terms, and by 2023 in actual terms (due to quickening inflation). The slow pace of economic growth experienced before the lockdown is unlikely to be broken in the next few years, unless substantial regulatory reform occurs to dramatically improve the ease of doing business. The already slow pace of economic growth, with high levels of state control and interventions in the economy, including a substantial rise in red tape over the past decade, is also a risk to the post Covid-19 recovery. Lingering restrictions, even under levels two and one, will also quell the potential for a rebound.
While we expect the unemployment rate to average 36% this year, the risk is that it could rise significantly higher. Many businesses will struggle to re-open, while the demand for goods and services has weakened substantially under levels five to three, and will take longer to recover, in turn suppressing business activity. Failure to put in place measures to further invigorate and support economic activity in South Africa slows down the economic growth rate and so increases unemployment.
FocusEconomics: What more could the government do to support the economy?
AB: South Africa’s very slow pace of reform continues, particularly in respect to adopting the Treasury’s growth plan. The 2010s also lacked meaningful fiscal consolidation, along with over spending and inadequate revenue collection, leading to a series of credit rating downgrades, negatively impacting investor sentiment. Market negatively perceived policies and proposals like EWC (expropriation without compensation) and prescribed assets have also afflicted perceived economic growth prospects, and so perceived returns on investment and investor appetite.
FocusEconomics: The Covid-19 crisis has worsened the precarious fiscal position. What are the key reforms needed to put the public finances on a more sustainable path?
AB: South Africa’s very large fiscal deficit this year is being funded significantly by rising debt, and short-term debt issuance has increased particularly, while severe interest rate cuts have steepened the yield curve. Short-term debt issuance is likely to continue. While the SARB bond buying program has reduced the cost of higher government borrowing, this is not a sustainable mechanism, as it will eventually exceed restrictions on the amount of debt it can hold. The excessive costs in public expenditure on above-inflation increases in civil servant renumeration needs to be reined in to ensure government sustainability.
“Further rating downgrades are likely as
South Africa is on a negative outlook from two
of the three key credit rating agencies.”
FocusEconomics: What is your outlook for the all-important mining sector for this year and next?
AB: South Africa’s mining sector has experienced severe restrictions in the lockdown, and has also suffered from rising costs of electricity and water; however, the onerous regulatory burden that was constraining it has lifted somewhat. Its recovery will depend on further easing of regulations, growth enhancing initiatives from the government and the sector itself, and an uplift in the global commodity cycle.
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"The return to the level of economic activity
experienced at the end of 2019 is only
anticipated by the end of 2025”
FocusEconomics: The government has pledged fiscal support. What is your view on the measures announced to date?
AB: The negative impact to economic activity, government revenues and households’ incomes, and so livelihoods, from the impact of the restrictive measures to contain the spread of Covid-19 will be very severe. Fiscal stimulation measures announced to date in South Africa to combat the effects of Covid-19 will be insufficient to prevent the economy contracting by at least 10% in annual terms this year. The R500bn stimulus package, while insufficient to prevent the unprecedented contraction in economic growth this year, is well targeted in what it does offer within limited budget constraints.
FocusEconomics: In addition to fiscal stimulus, the Central Bank has loosened its monetary stance. Do you see this loosening being effective, and what are your views on the direction of monetary policy ahead?
AB: The interest rate cuts by the South African Reserve Bank to date will not stimulate economic activity, but will provide some further relief to debt servicing, freeing up money used in part for interest rate payments so households and businesses with debt can use it in other areas, including cost containment to assist in bolstering financial health. The South African Reserve Bank (SARB) also currently indicates it sees limited further opportunity for more interest rate cuts. However, fiscal stimulus to combat the effects of Covid-19 on the economy is unlikely to be sufficient to cause, on its own, an upwards trend in CPI inflation. Therefore, it is likely that interest rates will not need to be hiked in the remainder of this year.
FocusEconomics: Weak fiscal metrics have led to rating downgrades in recent months. Do you see further downgrades?
Yes, further rating downgrades are likely as South Africa is on a negative outlook from two of the three key credit rating agencies. The impact would typically be to raise borrowing costs (bond yields). Even though the Reserve Bank bond buying program is keeping yields suppressed, this program cannot last forever due to legislative restrictions on the amount of governed debt the Reserve Bank can hold. If the government finances continue deteriorating, this would add to the volatility of financial market indicators, negatively impacting the growth and socioeconomic outlook.
FocusEconomics: The power sector is another key concern amid the restructuring of Eskom. Do you see progress in this area?
AB: Eskom’s restructuring is likely to be successful under the Presidential State-Owned Enterprise Council, led by President Ramaphosa. Nevertheless, it will be a lengthy process as there are deep fundamental weaknesses to be repaired. Progress— while significant—is slow, with the Medupi power station only expected to see the repair of its units by 2021.The stop-start nature of electricity supply in South Africa contributed to the fall in its World Bank ease of doing business global ranking, to 84th place this year from 82nd last year, out of 190 countries.