Ramaphosa’s economic headache
JOHANNESBURG – President Cyril Ramaphosa has his hands full in turning the ailing economy around, with analysts predicting low growth for the rest of the year while labour and opposition parties have accused government’s recent economic interventions for plunging the country into a technical recession.
Stats SA announced on Tuesday that the country had entered recession, with gross domestic product (GDP) growth for the second quarter down 0.7 percent for this year, following a 2.6 percent contraction in in the first quarter, with agriculture, transport, trade, government and manufacturing being the ones affected by the fall-off in activity.
Agriculture production has fallen by 29.2 percent in the second quarter, following a 33.6 percent slump in the first quarter, and Stats SA has largely attributed this to the decline in the production of field crops and horticultural products.
The transport industry’s 4.9 percent contraction has been also credited to decreased activity in both land and air transport, including strikes within the industry and a decline in freight transport, which contributed to the slowdown.
Cosatu has blamed the country’s slip into recession to government’s recent intervention in the economy, including VAT increase and sugar levy which decreased the spending power of South Africans.
The federation’s spokesperson Sizwe Pamla said while the first quarter was a reflection of the fourth quarter of 2017, the second quarter was the test of whether the interventions that were put forward in this year’s budget were working.
“This is the first time now we are having the opportunity to test. Those interventions have not worked. You will expect an economy to shrink if you increase VAT, if you impose sugar tax, if you have fuel increases that have led to us having the cost of living that is going to the roof. What it does is that the money that normally would have been spent on the economy by those who earn income, has not been spent on real goods that are produced by the economy,” Pamla said.
According to Stats SA, South African households tightened their purses for the first time since the first quarter of 2016 as their spending went down by 1.3 percent in the second quarter of this year.
Pamla said this was an indication that foreign direct investment was not the solution to the country’s economic problems and that active support of local small and medium enterprises was crucial.
Foreign direct investment
“The problem with foreign direct investment is that it encourages external dependency. You can see that external dependency with the price of fuel. It has got nothing to do with us because it is a question of the currency that is losing its value and 90 percent of fuel is imported from outside,” Pamla sid.
Jason Muscat, FNB Senior economic analyst, said data at hand thus far, including the August PMI and August vehicle sales, suggested that growth for the rest of the year would disappoint.
“We believe that growth forecasts will inevitably miss on the low side this year, jeopardising tax revenue and fiscal consolidation targets, and in turn, drawing the unwanted attention of rating agencies,” Muscat said.
Business Unity SA chief executive Tanya Cohen said the country’s slide into a technical recession was a timely warning to get the economy in order, failing which it will lose its only investment grade rating.
“Moody’s Investors Service said in its March 2018 review of South Africa’s sovereign credit rating that a failure by the country to revive its economic fortunes would be a push factor for a downgrade. The ratings agency set the clock to make a final determination on South Africa’s sovereign credit rating for 2019, immediately after the country concludes its general election,” Cohen said.
Cohen said the 29.2 percent contraction in the agriculture sector was symptomatic of the policy malaise, characterised by a lack of clarity and certainty, that is gripping the country.
Political analyst Lukhona Mnguni said the technical recession was an indication that the country’s problems were still to mount.
“Our problems are really getting started. Massive capital outflow still ongoing, a Rand that is currently trading at R15 to the dollar, and massive other constraints like fuel price increases and so on can only mean the beginning of more problems. To an extent these problems are to be blamed within politics and on the other hand we have massive structural issues that of course to a greater extent can only be solved through politics. So indeed the person is political,”Mnguni said.
The interventions included, increased investment in public infrastructure, support for entrepreneurship and employment opportunities for youth and women, as well as small and medium businesses, trade support measures for sectors such as sugar and products affected by big import surges and localisation of procurement.
EFF national spokesman Mbuyiseni Ndlozi has blamed what it called Ramaphosa reliance on the private sector to reignite and transform the economy and create jobs.
DA leader Mmusi Maimane has indicated that he was planning to call for the sitting of the National Assembly to debate the recession, which he also blamed on tax hikes and economic mismanagement by the ANC. – Additional reporting by Kabelo Khumalo