The four things South Africa Inc must do, now…
The V-shaped economic recovery that was predicted by market commentators in the early months of pandemic appears to have come to fruition, with most countries recovering strongly on the back of record levels of international trade and improvements in global trade relations. “Global trade uncertainty has fallen off; this coupled with a rebound in international trade is a positive development that has played out over the past six to 12 months,” said Kevin Lings, chief economist at STANLIB Asset Management. He was commenting during the opening presentation to The Investment Forum 2021, recently hosted by The Collaborative Exchange.
The good news for South Africa is that global economic growth has translated into a year-long boom in commodity prices. Base and precious metals such as copper, iron ore and some of the platinum group metals have more than doubled in price as demand soars. This price surge came at an opportune time for both the national tax authority and the struggling mining sector. Mines have used their record profits to pay off debt and reward long-suffering shareholders while the South African Revenue Share (SARS) has welcomed every rand of additional tax revenue… Lings commented that buoyant commodity prices were good for the local currency; but warned that the party would not last forever. “The supply shortages [that have driven commodity prices higher] will eventually even out and the rand will come under renewed pressure,” he said.
Do not read too much into short-term growth
There is growing excitement over South Africa’s economic growth prospects with various institutions forecasting around 4.5% GDP growth in 2021 with a strong 3.5% in 2022. Given the triple positives of economic growth, soaring commodity prices and a strong rand we wondered whether local financial advisers should start calling their clients to declare: “Pop the champagne corks, everything is going to be okay.” Unfortunately, Lings called last round well before curfew, pointing out that the 2021 growth number was entirely due to base effects, and the 2022 forecast mostly to pent up demand. “Even with two years of good growth we will not reach 2019 GDP; the real battle is whether SA can maintain growth above trend over the following years,” he said.
Those wondering what is meant by ‘base effects’ will appreciate the following example. In April 2020, at the height of South Africa’s lockdown, there were fewer than 500 motor vehicles sold countrywide. A year later, as the economy normalised, statisticians were able to declare a 6495% year-on-year growth in vehicle sales for April 2021, despite these numbers being pathetic compared to 2019 or even 2018. Assuming a similar number of vehicles is sold each month until December, the sector will achieve average growth of 566% for 2021, pulling the overall GDP higher. This may be an extreme example; but it clearly illustrates how an economy can bounce back strongly following a crisis, despite remaining below pre-crisis levels.
Four steps to fix South Africa Inc
South Africa needs multi-year, above-trend economic growth to have any chance of addressing structural issues such as education, inequality and unemployment. Lings reminded the audience that growth was the key to addressing structural issues rather than the other way around, before offering four steps that would put the country’s economy back on the front foot and, possibly, extend our short-term winning streak beyond 2022.
Step 1:Tackle Covid-19
“We need to get the pandemic under control to have any chance of lifting South Africa’s growth meaningfully and we cannot afford to have Covid-19 lingering for the next two or three years,” said Lings. Vaccine distribution will prove critical in this regard… And although there are mixed feelings about the progress to date, it remains an imperative to achieve some type of population immunity by latest end-June 2022. Achieving this will ensure that pent-up demand in the economy bolsters growth into 2023 and beyond.
Step 2: Practice fiscal discipline
Lings spent some time discussing South Africa’s debt-to-GDP reality and warned that a disciplined approach to debt was necessary to avoid further credit agency ratings downgrades, declines in business confidence and a higher corporate and individual tax burden. “If government gives in to [public sector wage] pressure they will destroy the sense of fiscal discipline that has recently emerged in public finances,” he said. “We can get away with more than 0% but cannot allow these increase to go back to where they were previously”.
Step 3: End PPP lethargy
Corruption and mismanagement at State-owned Enterprises (SOEs) has left South African taxpayers with a dismal legacy. Not only have existing assets been allowed to decay; but much-needed new infrastructure projects have been put on ice. “Growth in fixed expenditure by SOEs has been pathetic and our infrastructure is under severe pressure,” said Lings, before holding up public / private partnerships (PPEs) as the solution. It is time for government to ‘walk the talk’ in bringing these projects from PowerPoint presentations at investment road shows into the real world: “Visible implementation is the only way that people will believe these infrastructure projects are going to happen”.
Step 4: Fix municipal finances
South Africa’s municipal finances are in a shocking state with outstanding collections totalling some R220 billion countrywide. This collections shortfall means that municipalities in turn owe small, medium and micro enterprises more than R70 billion for goods and services. The state of municipal finances is contributing to a never-ending cycle of business collapse, service delivery failings and service delivery protests. We need to deal with municipal finances decisively, municipality by municipality … if we get things right, the process itself will translate into growth opportunities,” said Lings.
The global economy is roaring ahead on the back of BREAK stronger international trade; demand-driven commodity price recovery; and record levels of fiscal stimulus in developed markets. These factors will help South Africa in the near term, with the current account benefitting from higher export revenues offset by lower import prices due to rand strength. But the longer term domestic growth outlook is less clear. “South Africa will have above trend growth for two years; but beyond that there are four critical areas that must be tackled to keep the growth momentum … once these areas are fixed we can deal with the larger structural issues,” concluded Lings, keeping his fingers crossed that global inflation would not become a major issue.
Writer’s thoughts:
We enjoyed Kevin Lings’ description of base effects in South Africa’s GDP growth context, and wondered how many financial advisers have had similar discussion with their clients this year. The topic must crop up, given the surge in asset prices over the 12 months to end-June 2021 compared to the growth in clients’ investment account balances. Have you had tough discussions with your clients about base effects in the portfolio returns context? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
