FANews
FANews
RELATED CATEGORIES
SUB CATEGORIESFeatured Story |  Straight Talk |  The Stage | 

The caveat of South African growth

31 January 2018Jonathan Faurie
Rian le Roux – Economic Strategist at the Old Mutual Investment Group

Rian le Roux – Economic Strategist at the Old Mutual Investment Group

The economic roller coaster ride that the world, and South Africa in particular, has been on over the past two years is gaining momentum with no promise of stopping any time soon. While many countries in the rest of the world – particularly in Africa – have managed to grow their economies, the news has been bleak for South Africa. However, this is about to change.

The changing tide

Speaking at the recent Old Mutual Investment Group Fourth Quarter economic media briefing, Rian le Roux – Economic Strategist at the Old Mutual Investment Group – said that the outlook for South Africa is leaning towards a miniature economic revival. 

Without committing himself to a full blown economic recovery, Le Roux pointed towards 2018 growth numbers of one and a half percent for the year, adding that 1% is a very pessimistic assumption.  

Signs of recovery

While growth of 1.5% is poor when one considers the growth in other African emerging markets, it is significantly better than the 0.8% growth that the South African economy has achieved in a year where its credit status was downgraded twice. 

Le Roux pointed out that despite the downgrades, growth in the second quarter of the year was good, and growth numbers of the third quarter is shaping up to come in at 2%. 

However, while Le Roux is optimistic about the future outlook for the South African economy, he sounded a warning that these growth numbers are not signs of a confidence recovery, and it is not yet a sustainable or firm economic recovery. 

Key messages

So, what are some of the messages that Le Roux feels are key to the future South African growth story? 

The first message is that the South African Reserve Bank has become hawkish. The South African short-term inflation outlook as recently deteriorated but will, in the future, be affected by issues such as rising oil prices and increases in electricity tariffs.


“Don’t expect an easing up in fiscal policy. Easier fiscal policies require monetary policy compensation. Otherwise, higher inflation is the only other long-term outcome, warned Le Roux who added that once fiscal policy tightens significantly, the rate environment will ease again. 

The second message again warns against excessive optimism and pessimism following the ANC Elective Conference. 

“Sweeping changes are unlikely. There will be a general sense of clam over the medium term, but economic uncertainty should ease and there will be a heavier focus on fixing urgent problems,” said Le Roux. 

Concerning the budget

It is heartening that economists are starting to talk about a positive South African growth story. However, if this is to be achieved there needs to be a growth stimulus in the 2018 budget that will generate income for government. 

Gigaba has been outspoken about this and has indicated that government needs an additional R15 billion in additional tax revenue. He has also sounded a significant warning that government is considering a R25 billion reduction in spending. 

“Government has already raised the tax collection ceiling by R15 billion; if they raise it by a further R15 billion, it will amount to R30 billion which is a big increase. So where will they achieve this? I believe a serious case can once again be made for raising the VAT rate by 1%. The current dialogue surrounding this is that it will significantly affect the poor, but it will also affect the middle class and rich sector of society because they spend more. If the VAT rate is raised by just 1%, the price of a basket of goods only increases by an estimated 60 cents, but it will generate R22 billion. Besides, there are a lot of VAT excluded items, so the poor won’t get significantly affected,” said Le Roux. 

There are other options, but they will cause controversy. In addition to raising the VAT rate, Le Roux believes that a serious case can also be made to relook at the civil servant wage bill. There have been significant calls in the past to address this with political commentators saying that there are too many workers who are getting paid too much. 

Don’t ignore the north

While we’re in a significantly different position than Zimbabwe, both politically and economically, we cannot ignore what just occurred north of our border. 

It must be said that the economic and political situation in Zimbabwe became untenable and the Zimbabwean military, acting on behalf of the people, drew a line in the sand and said this far and no further

Coming back to South Africa, while there is a significant case to be made for raising the VAT rate and addressing the civil servant issue, is there political will to do this? There will no doubt be a significant public outcry among the poor if the ANC does this, and it is a sector of the population that the ANC has relied heavily on in the past for votes. 

We may not see a military coup, but we may certainly move towards a possible regime change if the ANC makes the wrong decisions in the public’s eye. 

Editor's Thoughts:
There are signs that South African economic growth is possible. However, this comes with a caveat; growth is possible only if fiscal discipline is achieved. Government needs money, but it also needs to cut ill-disciplined spending. We all need to play our part. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comment on this post

Name*
Email Address*
Comment
Security Check *
  
Quick Polls

QUESTION

There may be a shock on the cards on 21 Feb when the Finance Minister announces that there will be a 2% VAT increase. What effects will this have?

ANSWER

It will generate the much needed tax revenue that government needs to address its widening budget deficit. It’s a good choice.
It will weaken the ANC. They rely on the poor vote and the poor will be most affected by the VAT increase. The ANC must tread carefully here.
There will be little change. It is just more money for government fat cats to pocket.
AE fanews magazine
FAnews February 2018 EditionGet the latest issue of FAnews

This month's headlines

Viceroy in the purview of the FSB
The fundamental right to work
AI for dummies
‘Day Zero’ the day taps are anticipated to run dry
Pre-existing conditions: insuring the uninsurable
Subscribe now