Beyond the Budget Speech: South Africa’s macroeconomic outlook

While South African Minister of Finance Enoch Godongwana delivered what has been called a largely “good news” speech for his first tabling of the national budget, Michael Hewson, Director of Graphene Economics, says tough choices need to be made.

“We are all faced with the choice of direction,” Hewson says. “We can choose between viewing our current situation purely as a crisis, or as an opportunity.”

Inklings of post-pandemic recovery

“We have seen a pick-up on flights worldwide and restaurant and beverage income in South Africa, although both are still below pre-pandemic levels,” says Hewson. “While the new Omicron variant of COVID-19 has had the highest number of daily cases in South Africa to date, the number of deaths is lower. The other important indicator that the pandemic is starting to dissipate is that the waves have started getting a bit further apart. While we are certainly not out of the woods, the fact that the impact is starting to subside is positive.”

However, Hewson says COVID-19 has worsened certain risks, including social cohesion. “We saw this with our July 2021 riots, the US insurrection, and protests in France and many other countries,” he says. “Other increased risk areas include livelihood crises, climate action failure, mental health deterioration, extreme weather, debt crises and cybersecurity crises.”

Governments need to seek to address these risks and while Hewson says a one-size fits all approach to fiscal and monetary policy was appropriate at the onset of the pandemic, policy makers and business leaders now need to determine what is required in different markets.

State of the South African economy

“Our growth has been pedestrian for a number of years building up to 2020. It had been below 2%,” says Hewson. “In 2020, growth dropped to a 7% contraction, which was actually better than was initially forecast. It has since recovered to about 5% in 2021 and is expected to return to lower levels for the next few years.”

On the plus side, commodity prices helped to protect South Africa’s economy in 2020 and 2021, notably rhodium (South Africa is the largest producer in the world).

Some sectors, including finance, real estate and business services, continued to grow despite the pandemic, largely because remote work remained feasible during lockdowns.

Wealth (measured in terms of GDP per capita) took a severe knock, however, and Hewson notes it currently measures at 2013 levels. Unemployment remains a major contributing factor in this regard and a primary challenge to South Africa’s economy. It is currently the highest in the world, as is the country’s level of inequality, as measured by the Gini Index.

“According to World Bank's Poverty and Shared Prosperity 2020 report, the Gini coefficient increases about 1.5 points in the five years following major epidemics, such as H1N1 (2009), Ebola (2014), and Zika (2016),” says Hewson. “While the effects of the COVID-19 pandemic are still being calculated, early estimates predicted an increase in Gini coefficient of 1.2-1.9 percentage points per year for 2020 and 2021, signalling an increase in income inequality, which is bad news in South Africa, where inequality is already a pressing problem.”

The reality, he stresses, is that South Africa was in a poor situation pre-COVID. “The pandemic, together with various other factors has put us in a crisis situation. “If we look back at history, we see how crises cause structural changes and some countries have positioned themselves better than others to take advantage of the tailwinds that arise from a state of crisis. South Africa needs to address its competitiveness issues.”

To improve competitiveness, he says the country needs to focus on seven key areas: growing the economy, creating jobs, decreasing debt levels, increasing consumer savings, encouraging foreign direct investment, increasing wealth and reducing income inequality.

Trends driving global competitiveness

Hewson says South Africa needs to embrace the green economy. “We have such great conditions for renewable energy. In 2021, it was announced that independent power producers could produce up to 100MWH, and in his Budget Speech, the Minister announced plans for Eskom to sell off some of its distribution assets to assist in solving our energy challenges. The green economy also creates considerable opportunities for jobs if we take advantage of business opportunities in that sub sector.”

Another area that needs urgent attention is digitisation, from improving internet coverage to resolving spectrum issues. “I’m encouraged by the announcement by Minister of Communications and Digital Technologies Khumbudzo Ntshavheni that government plans to give 10GB of data to each household. Connectivity affects everything from enterprise businesses to SMME development, and improving service delivery,” says Hewson.

“Digitisation is also important in addressing unemployment – remote job openings have doubled compared to pre-pandemic. COVID-19 created big shortages in talent as digital transformation accelerated. This is an area where South Africa needs to focus. We also need help businesses to employ more people. While President Cyril Ramaphosa says it’s the job of businesses to create employment, that means government needs to cut out red tape and create a more enabling and competitive environment for businesses and employees.”

For example, the critical skills list has recently been updated and President Cyril Ramaphosa has spoken about potentially issuing visas for remote working.

While inflation has caught many markets (including the US) by surprise, South Africa’s National Treasury’s prudent approach has kept the country’s inflation within the target band of 3% to 6%.

Nevertheless, prices in certain sectors of the economy have surged, for various reasons. “In some cases, it is demand driven and in other cases, it is supply driven,” says Hewson. “You can see the effect of energy prices in many countries on inflation. This will now be exacerbated with the war taking place in Russia and Ukraine because it will cause a spike in energy prices.”

Global tax reform continues to make headlines, with the tax environment changing more rapidly than in previous decades. “Transfer pricing and related issues are likely to remain priorities for revenue authorities on the African continent for the foreseeable future,” says Hewson. “The implication for multinational entities is that the role of the tax function will become increasingly significant in managing business risk.”

Where to from here?

“We are in a difficult place as a country. We had low economic growth and this has been exacerbated by COVID-19. We have had some tailwinds through the commodity prices and surplus revenue collections, but the risks arising from the pandemic, together with other risks present pre-covid, are very challenging. Thankfully, we have stopped digging and we are trying to repair,” says Hewson.

“The Finance Minister spoke about fiscal consolidation – trying to return money to people, plans to increase expenditure on the economy, and changes to the trajectory of public sector wages. This is encouraging, as is the acknowledgment of the critical need to grow jobs. One of the big factors that inhibited our growth during the previous decade was the erosion of total productivity factor. The WIDER Working Paper 2022/3, Macroeconomic risks after a decade of microeconomic turbulence: South Africa (2007–2020), traces South Africa’s current macroeconomic challenges back to microeconomic policy, as opposed to alternative accounts that see current growth performance as a result of external shocks or macroeconomic management. Digitisation can assist with addressing this, and it’s important that both government and business work together to embrace the opportunities that digitisation, the green economy and other global trends, have created.”