By Andrew Duvenage
RECENTLY published economic data indicates that the economy finally has some green shoots.
The latest gross domestic product (GDP) figures reveal that the economy grew 4.6 percent in the first quarter of this year on an annualised basis, better even than the South African Reserve Bank's upgraded forecast of 4.2 percent.
However, it is important to remember that this growth is off the back of a 7 percent retraction last year.
High commodity prices for platinum group metals and iron ore have helped South Africa's current account surplus, while dollar weakness has helped to strengthen the rand. Even though the agricultural sector contracted 3.2 percent on a seasonally adjusted, annualised quarter-on-quarter rate basis, this is expected to be only a temporary setback. The sector expects one of the best years on record in 2021, with the citrus industry predicted to export a record 159 million cartons this year – up from 146 million cartons last year – and the wine grape, maize and soybean crops are all expected to be up this year.
Business confidence indices indicate an encouraging upward trajectory. The Business Confidence Index published by South African Chamber of Commerce and Industry (Sacci) rose to 97 points for May, up from 94.7 points the previous month, while the RMB/BER second-quarter Business Confidence Index reveals a 15-point increase, up from 35 points in the first quarter.
President Cyril Ramaphosa's recent announcement that the licensing threshold for embedded generation projects will be increased from 1 megawatt (MW) to 100MW within the next two months once new regulations have been gazetted was welcome news for a business sector that been calling for the threshold to be increased for more than two years. The decision is expected to result in investment of R75 billion and potentially create more than 16 000 direct jobs.
Despite these positive metrics, the risks to the economy remain significant. The biggest challenge is to accelerate the rate of growth in a sustainable way that allows for the country's debt load to be meaningfully reduced while still allowing for investment into capacity generating or GDP growing initiatives.
The biggest risk to the economy remains Covid-19. The third wave of Covid-19 infections and with it a move to a higher levels of restrictions – including a ban on the sale of alcohol products, a restriction on leisure movements in and out of Gauteng, and the fact that restaurants can now only serve takeaways – is not ideal from an economic perspective. It remains to be seen what the economic impact of these restrictions will be – or the impact on business confidence – but suffice to say that South Africa cannot afford headwinds at this point. Questions must be asked as to the reason for the glacial pace of the vaccine roll-out and the impact that this will have on the recovery of the country.
In the current environment, can South Africa translate recent green shoots into longer-term, sustainable growth when much of the current recovery is being driven by consumption and prices rather than fixed investment? A telling indicator is that of gross fixed capital formation – a measure of investments being made – which declined 2.6 percent in the first quarter, while private sector investment contracted by nearly 18 percent.
The decline in fixed investment is reflected in rising unemployment. The country recorded the highest rate of unemployment in the 13-year history of Statistics South Africa's quarterly survey in the first quarter of this year, when unemployment figures increased 0.1 percent from the last quarter of last year to 32.6 percent. In the expanded definition of unemployment, this is an even more alarming figure of 43 percent, while youth unemployment is a demoralising 75 percent.
Even the agricultural sector, which is expected to see growth this year, is losing jobs. Agricultural jobs fell by 8 percent in the first quarter, the lowest since 2014, according to Statistics South Africa.
It is important to remember that the issue of growth pre-dates the Covid-19 pandemic, given that the economy has under-performed for more than a decade. Although the current economic indicators are encouraging, the expectation is that the current bounce will slow down to levels of 2 percent and below, with the country's growth projections for the next two years lower than both the developed world and our emerging-market peers.
In the mining sector, it is likely that the tailwinds in commodity prices will be passed through to shareholders as dividends as opposed to being reinvested into increasing supply capacity, and this is problematic from a long-term growth perspective. The sector continues to face a number of growth-inhibiting challenges, including policy uncertainty, regulatory hurdles and the inefficient processing of mining rights applications.
There is no question that over the past decade South Africa's mining sector has lost its competitive edge. To regain it will require significant and wide-ranging shifts.
The benefits of embedded generation projects will start to be seen in about 18 months. Until then, the country will continue to be at the mercy of Eskom's load shedding schedule as the embattled energy utility struggles to implement critical maintenance. In the medium term, as more businesses start to bring embedded generation projects on line, Eskom is likely to lose some key customers. To mitigate these losses, higher tariff increases can be expected, which does not bode well for those businesses still reliant on the national grid for their energy requirements. Private sector credit extension is slowing, indicating reduced demand. Demand in the housing market, which last year was fuelled in part by low interest rates, appears to be tapering off, which is starting to impact house prices negatively.
Sacci's trade activity index, considered a measure of sentiment regarding current conditions, dropped from 49 points in April to 36 points in May.
A key element of Ramaphosa's economic recovery plan is the issuing of new spectrum. An auction of broadband spectrum, valued at R8bn, was planned for March, but was beset with legal challenges almost from the outset and was eventually delayed by court order after the spectrum auction process was ruled unlawful and irrational.
Another key component of the recovery plan was a proposed infrastructure drive in which the government planned to mobilise private sector investment. A lack of bankable projects and limited live projects, however, mean that this, too, has failed to materialise.
South Africa cannot afford to miss the opportunities afforded by the green shoots. The current recovery is fragile. The key to transforming these green shoots into sustainable economic growth momentum is resolving the bottlenecks that hinder economic growth, the creation of a business- and investment-friendly environment, a move away from the government's current interventionist approach and ensuring citizens are vaccinated as quickly as possible.
Andrew Duvenage is the managing director of NFB Private Wealth Management.
*The views expressed here are not necessarily those of IOL or of title sites
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