by Heinrich Krogman | Nov 22, 2021 | Blogs
As the IEC announced the final election results, South Africans reflected on the outcomes: whether their candidate or party of choice saw the results they were hoping for, whether their protest vote made a difference to the municipal makeup or, for the majority, what the election results looked like without their vote. Most were however, celebrating the fact that they had gone without power cuts for at least three days.
After the dust settled, it emerged that the majority governing party, the African National Congress (ANC), lost some ground while maintaining their hold on 161 municipalities. The Democratic Alliance (DA) achieved a majority in 13 municipalities, while the Inkatha Freedom Party (IFP) won 10 municipalities. The largest change, however, was in the number of hung councils, i.e. those in which no party achieved an outright majority and would require parties to form a coalition or minority government. A total 66 Municipalities were reported as hung councils by the IEC, more than twice the number compared to the previous election’s 27.
Council members have 14 days after the announcement of the electoral results to meet and appoint (elect) its representatives, including the council speaker. While this does not pose a problem for councils with an outright majority, negotiating coalitions or minority governments can be very challenging. This involves agreeing on a broad policy agenda, which for many parties means compromise on their own electoral platform and ideals and agreeing on the composition of the executive mayoral committee, which have extensive executive power to run the municipality. However, a municipal council by resolution may remove its speaker (and mayor) from office with the support of a simple majority of council members, which makes these types of governments less stable.
Experience from previous hung councils are discouraging. Some worked for a while thanks to minimal commitments made by the parties involved, some worked initially as parties extended olive branches (mayoralty) as a show of good faith which was eventually abused, while others failed to work from the onset due to grandstanding and seemingly irreconcilable differences. This often left municipalities without the critical executive mayor or mayoral committee, which meant that many operations ground to a halt, and in most cases also saw career civil servants lose their jobs, amounting to a loss of institutional memory and experience in municipal operations.
Some hung councils will likely survive the first bout of appointments and horse-trading, some may even become shining examples for other councils to look up to, but many with persistent challenges are likely to fail and drag their constituents down with them. This is not outright pessimism over elected council members, or the parties involved, but rather the immense pressure of having to get a lot done with dwindling resources while building the proverbial house of cards.
What many South Africans are too keenly aware of is the mismanagement and corruption that accompany the financial crisis faced by local municipalities. While poor management and corruption has eroded the institutions and infrastructure that deliver basic services, the underlying structural economic issues are what really fuel the crisis in local municipalities.
Municipalities are mostly funded by subsidies from national government, charging property rates and selling services, like water and electricity, to their constituents. However, these main income streams are under pressure from a number of factors which are particularly prevalent in small town South Africa.
Horse trading might be the order of the day for many councils, but as the euphoria of playing politics fades and the reality of running a municipality sets in, the seemingly insignificant flaws of an uneasy coalition will push many to the brink and may make things worse for everyone. Of course, municipal mismanagement and financial stress is also present in outright majority run municipalities, but as conversations about the fairness in the division of revenue continue, the quality of governance at municipal levels could prove harder to address in coalition governments. Time will tell if we can learn something about governance from coalitions, or if perhaps the pressure will shift the political centre of the governing parties towards a new political moderate.
by Heinrich Krogman | Jun 8, 2021 | Blog
As governments all over the world go through the final stages of ebb and flow on opening and closing their economies, South Africa seems to be keeping pace with the global recovery. Merchandise exports continue to outpace imports while the rand continues to strengthen against all major currencies. These developments have a lot to do with the rebound in foreign demand for commodities, but most other domestic recovery indicators are also encouraging. There is, however, still missing elements that hinder the process of getting back to a pre-pandemic economy and many more to overcome it.
As things go back to ‘normal’ sectors that have been most restricted during the pandemic continue to suffer from the low rate of vaccination. South Africa’s trade in services (notably tourism) will be the last horse out of the stables and will likely miss the initial release of pent-up demand for foreign holiday seekers coming out of their hermit stupor.
Unfortunately, as if given license by its own shuttering, South Africa’s economic strategy during the pandemic has also turned inward. True, much attention has been afforded to the African continental free trade agreement (AfCFTA) –as a massive step towards further economic integration on the African continent- however, the domestic policy response seems to view it primarily as a way to expand specific sectoral interest.
Referring to the sectoral master plans that all follow a similar strategy; target sectors for intervention and impose stricter regulations on the supporting value chain(s), attempt to increase competitiveness through various support measures with a focus on local industrialisation, and aim to sustain growth through exports to new markets. While this seems like a great way to boost domestic output, the strategy might simultaneously overestimate the value of localisation while underestimating the benefits of foreign competition, partnerships, and support services that fall outside of the blessed sectors.
All the while, pre-pandemic systemic issues remain ever-present; notably load shedding, jobless growth, fiscal risks, and still no high demand radio-frequency spectrum auction. To be fair, given the policies put in place to safeguard South Africa’s citizens and the healthcare system from being overrun, it’s not surprising that little progress has been made on these fronts.
So, what has a year of ‘isolation’ done for South Africa’s trade policy discourse? The fragility of the global value chain was certainly highlighted and pressed as a motivator for further domestication of outputs. It is not untrue that the global value chain is fragile to all sorts of shocks, but to assume that it’s a permanent threat is ridiculous especially when the current boom in South Africa’s exports and a stellar recovery in the value of the rand is down to the recovery of the global value chain.
Wanting to have more things made in South Africa is not inherently terrible and having an export-oriented economic strategy is not bad either. Wanting control over most of it might be the tricky part especially when negotiating with much more vulnerable states on deeper economic integration and continental prosperity.
by Heinrich Krogman | Mar 26, 2021 | Blog
Heinrich Krogman
Before the virus arrived in South Africa the major concern was how Chinese restrictions would affect global markets; trying to figure out which value chains would be affected by the restrictions in Wuhan and how it might spread to Europe and beyond. Soon pandemic jokes turned into serious concern as people stormed grocery stores for toilet paper, non-perishables and grains. Masks became a more common sight, especially at airports as some of the last travel was made in the first quarter of 2020.
By 26 March 2020, the economic pessimism of 2019 could wait, there were much more serious threats on shore, and leaders were faced with unprecedented decisions about how to deal with the health crisis promoted by Covid-19. One year later food is still available, and it turns out no one needed 200 rolls of toilet paper. We have all become accustomed to wearing a mask and the frequent sanitising required. That is not to say that nothing else has changed. South Africa was in a difficult economic position before the pandemic and, as we now know, things got about as bad as we thought it would. Here are a few charts that tracked the impact of the pandemic in 2020.
Real GDP by Quarter, Constant 2010 prices, Rand billion
Source: Statistics South Africa[1]
In terms of real economic output, South Africa is essentially back in 2012/13. However, the structure of the economy has shifted slightly further towards the tertiary sector compared to 2013. The Manufacturing, Mining and quarrying, and Construction sectors’ share of total GDP decreased the most compared to 2013’s economy while the Finance, real estate and business services, and General government services sectors’ share of total GDP picked up the slack. Rather frustratingly all sectors of the economy (save for Mining and quarrying) were on a general upwards trend from 2013 to 2019, albeit at a decreasing rate.
Source: Statistics South Africa[2]
The employment rate also took a sharp turn in 2020. Initially, a large number of people were economically inactive due to lockdown restrictions and employed and unemployed figures too decreased sharply in the second quarter of 2020. As restrictions lifted and more people could return to work, the unemployment figures started to outpace employed figures. In the fourth quarter of 2020 the unemployment and absorption rate for Women were higher than Men whilst the highest rate of unemployment and absorption by population groups were in the Black/African group.
Nominal employment figures, millions
Source: Statistics South Africa[3]
Where output and employment declined, expenditure was also affected. Household expenditure saw a significant decline to a six-year low of R1.85 trillion largely driven by reductions in spending on Restaurants and hotels, Clothing and footwear, and Alcohol beverages, tobacco and narcotics compared to 2019. Gross fixed capital formation also saw a steep decline to R498 billion with all sectors coming off worse than 2019, accompanied by a huge drawdown of inventories. Fortunately, expenditure by general government was steady at R654 billion, while a generous trade surplus saw the current account balance rise to R297 billion in September 2020.
Considering these patterns, the reprioritised R50 billion allocated to social welfare was critical to keep households afloat. Businesses were not as fortunate as the reduction in expenditure meant that loans were a significant risk. This was reflected in the low uptake of the Covid-19 Loan Guarantee Scheme.
Given the massive stimulus packages from the US, China, EU, UK and Japan, one of the main concerns following the economic downturn of the pandemic is a rapid rise in inflation, something which South Africa might have a different challenge with as y/y CPI continues to come in at the bottom end of the target range while inflation for certain products seem to be rapidly increasing.
As fiscal measures are used to support households and businesses, bond buyers have their pick of the litter, albeit potentially with more risk sensitive. While South Africa’s long-term bonds have maintained their yield during 2020 (with some notable swings) yields have been rising over the last month signalling a downturn in demand.
For the economy to get back on track, government expenditure needs to be focused on increasing productivity (which means investment in physical capital) while ensuring political and fiscal stability that will continue to attract private sector investments. This is not an impossible task as there is a lot of liquidity in the global market, but investors will be watching carefully how South Africa’s recovery efforts play out, starting with the successes and failures of the Covid-19 vaccination plan.
[1] http://www.statssa.gov.za/?page_id=1854&PPN=P0441&SCH=72708
[2] http://www.statssa.gov.za/?page_id=1854&PPN=P0441&SCH=72708
[3] http://www.statssa.gov.za/?page_id=1854&PPN=P0211&SCH=72942
by Heinrich Krogman | Sep 27, 2020 | Blog
Details on South Africa’s economic contraction are finally available. Unfortunately, the results are worse than anticipated by both the Reserve Bank and National Treasury, which means fiscal and monetary policy will have to be reviewed and adjusted …. again. The major dials to ‘heat up’ and ‘cool down’ the economy, fiscal and monetary policy continue to play their part in South Africa’s economic recovery. But in their current settings, the environment is ripe to fuel further inequality.
The figures also suggest that inequality and poverty are likely to remain the most critical socio-economic challenges faced by South Africa. Unemployment at the end of the first quarter of 2020 stood at 30.1{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} while average monthly salaries, in the formal non-agricultural sector, decreased by 0.2{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} quarter-on-quarter.
Where governance and institutional failure played their part before the pandemic, the dynamics of an economic recession coupled with the global economic shock are about to take over, putting policymakers and political parties in a high stakes Catch-22. The options are either to maintain a countercyclical policy, which is an unpopular campaign strategy when the economy is doing well or to keep the policy dials on ‘accommodating’ and risk further entrenching inequality.
An accommodating monetary policy stance can play its part in addressing consumer demand and savings dynamics, assuming both the National Treasury and the Reserve Bank maintain their principles.[1] However, such an approach can also lead to an increase in inequality as it tends to favour households and businesses with larger disposable income, liquid assets, and good credit records.
Low-interest rates, low or stagnant taxes, and an effective disincentive to save means that conditions are ideal to accumulate assets. Further fuelling these forces is the anticipated surge in the supply of assets as households and businesses in distress dispose of them, to help with cash flow.
Through a mix of fiscal support packages, debt collection regulation and relief options from banks, South Africa’s number of debt summonses and judgments were at a much lower level this year compared to the same time last year. The total number of civil summonses issued for debt decreased by 38,3{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in the three months ended July 2020 while judgments decreased by 52,3{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} compared with the three months ended July 2019.
This is a very encouraging statistic, but within the context of the lockdown, rather reflects restricted demand than a reduction in non-performing loans. Second quarter GDP figures show that household expenditure (-15.7{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}) and gross fixed capital formation (25.8{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}) decreased markedly from June 2019 to June 2020; annualised these figures are -49.8{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} and -59.9{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}.
From a cynical perspective, this could be viewed as an orchestrated transfer of wealth, but these same set of tools are used to serve the purpose of redistribution and reducing the concentration of wealth; at least they should when the economy is improving and supporting policies are in place.
Under current circumstances, an accommodating policy stance makes perfect sense as households and businesses would need help during tough times, but like Aesop’s grasshopper, South Africa did not prepare for the tough times. To be fair, few countries did for an emergency of this magnitude. Fiscal space is already squeezed to its limits while the repo rate is at historic lows – fortunately with some space left for adjustment.
Many factors have played their part to build the economic landscape that South Africans face today and many of these still must be addressed. Fortunately, it seems like the country is over the worst of the health crisis, turned demand crisis, and a concerted and coordinated effort can possibly take hold to turn the tide.
Progressive taxation, targeted government programmes, and pro-poor policy should see to it that the barriers of entry to asset ownership for low-income households and fledgling businesses are addressed and that asset disposal comes as a last resort. However, for the time being, the policy dials will likely remain ‘accommodating’. Fiscal policy will continue to play its role in pursuing the promises of the electoral mandate while departments, agencies, and programmes have to make do with less.
Some reprieve might be available as investor appetite could swing to favour long term bond purchases, now that yields have stabilised after March to May’s volatility, which could give National Treasury the momentum to maintain consumption expenditure and welfare programmes.
Households and businesses in distress should continue to receive government support but this is unlikely to continue for long. From a revenue perspective, capacity to finance government expenditure is evaporating and some form of countercyclical policy needs to be enacted, not only to provide support as and when needed, but in the longer term to address the balance of wealth and inequality. Unfortunately, long-standing risks remain and socio-economic transformation will become harder and more pressing than ever.
[1] As it relates to price stability and supporting the optimal allocation and utilisation of public financial resources, informed by the elected government.
by Heinrich Krogman | Jun 15, 2020 | Blog
Heinrich Krogman and Anna Ngarachu
The latest set of GDP figures for the first quarter of 2020 is expected to be published by Stats SA on 30 June and it’s less a matter of “what’s the verdict?” and more a matter of “how bad is it?”
South Africa entered 2020 on the back of a technical recession due to production side losses in almost every sector with a set of expenditure side losses to match. Initially, detractors flagged the blurry policy direction and a lack of decisive leadership, where really one of the largest domestic problems was a lack of investment. While globally, pressure came from a fracturing global trading system, prevailing risk-off investment sentiment, and very accommodative monetary policy in most developing countries, this drove financial investments to traditional safe havens. Yes, these were the simpler times.
Fast forward to three months later and South Africa has recorded almost no domestic investment for the year, while household and business expenditure options are severely limited. The only exception is the public sector, but it too is hamstrung with the necessary but grim requirements to save human lives and a very tight budget to do so.
The pandemic would not have been welcome during the best of times, but Quentin Tarantino could not have scripted a more gruesome third act. The hard lockdown has caused severe economic damage during April and has possibly set the trend for the rest of the year.
Here is what we have heard so far: -7{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, -6.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, -5.8{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} and -4.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. This is South Africa’s forecasted real economic growth rate for 2020 from a range of domestic and international observers. While these estimates are probably close to what we can expect, there is still a significant margin between -7{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} and -4.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} especially when it comes to a nominal R5.1 trillion economy. Another figure, 2024, is the estimated year in which South Africa’s economy will be back to 2019 levels[1].
Increasing debt is imminent, with the government having to borrow R95 billion from external financial institutions to fund its R500bn economic support package. While it is necessary, this support package will weaken public finances and the budget deficit is now expected at 13.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of GDP in the 2020 fiscal year, up from an estimated 8.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. Furthermore, the country’s debt burden is expected to be 15 percentage points higher, or 84{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of GDP by the end of the 2020 fiscal year.
Despite the economic support packages released by the government, massive job losses are expected both in the formal and informal sector. Further unemployment remains a high risk – already at its highest rate in decades. Projections by the National Treasury Director-General, Dondo Mogajane, indicates that the unemployment rate could reach 40{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, a massive hike from the current 29.1{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}.
The Reserve Bank’s decision to cut the repo rate, a third time (now at 3.75{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}) already signals that monetary policy will be used as a measure to boost the economy, perhaps restarting the quantitative easing debate. This is because cutting interest rates may not be enough to ride out the pandemic especially as the usual engines of economic activity have slowed down and credit and indebtedness are yet to rise. The Monetary Policy Committee has in fact gone as far as to include in their assessment potential of two further cuts through the remainder of 2020.
While the national budget will dominate economic discussions for the rest of the year, rather than focusing on the bigger picture end of year results, we can look at some of the higher frequency data that can give an indication of South Africa’s current state. We expect to see some critical releases before month-end that will help paint a much clearer picture.
One measure that will quickly become obsolete in a post-pandemic world, is the output gap: the difference between actual output and potential output (or GDP). It is rather complicated to measure and forecast, but fortunately, proxy indicators can be used to look for trends. In a relatively static economy with slow structural changes, like South Africa, one can look at the changes in electricity distribution and compare to previous years to get an idea of economic output.
Fortunately, Eskom publishes a weekly system status report that shows this particular proxy. While 2019 is perhaps not the best baseline for this, the 2020 year to date Dispatchable Generation Energy Sent Out is lagging by 7 597 GWh compared to 2019, which is a year-to-date growth rate of -8.99{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. This can be a telling gap for South Africa’s estimated 1.2 million people working in the manufacturing sector.
Another good indicator of economic health is new-vehicle sales. While this is a leading indicator and not a direct causative factor on economic output, it paints a picture of where growth might be slowest to return. The NAAMSA flash results for April are a throwaway, a total of 574 vehicles sold under lockdown, but May showed some signs of a return: 12 932 vehicles were sold, which is a far cry from the 40 428 sold in May 2019, but the changes in the composition of sales tell an interesting story.
Year-to-date passenger vehicle sales decreased by 35{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} compared to 2019, while light and heavy commercial vehicle sales decreased by 45{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} and extra heavy commercial vehicles decreased by 33{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. These sales figures directly impact South Africa’s automotive value chains and the associated services, but these sales figures also reflect household and business demand for transportation equipment and services, with the latter showing a slower rebound in demand. That’s the livelihood of an estimated 840 000 South Africans working in land transport services, transport equipment, and motor trade sectors.
There are other similar leading indicators from firms that are surveyed on a monthly or quarterly basis, all of which have recorded historic lows. But perhaps on the periphery of South Africa’s domestic lockdown regulations is the trade sector which reflects both South Africa and the global economy’s capacity to consume and supply.
March trade data actually showed surprising resilience, reporting a trade surplus increase on top of an increase in total trade compared to February 2020. The surprise comes as China, one of South Africa’s largest trading partners, had already implemented a lockdown. Buoyed by demand from Europe and Africa, South Africa was on track for a year to date increase in exports and a growing cumulative trade surplus, however, the April data reversed all that optimism. Exports in April shrank by 55.1{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} while imports only decreased by 6.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} leaving South Africa with a new cumulative trade deficit of R326 million and annual growth in exports of -3.5{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} year to date.
South Africa’s largest cumulative decreases in exports were a result of reductions in exports to Africa (-12.4{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}) and Oceania (-14.7{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} albeit from a much smaller nominal figure). Meanwhile, cumulative imports from Africa increased by 0.6{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} while imports from all South Africa’s remaining suppliers (America, Europe, and Asia) noticeably decreased compared to the 2019 year to date figures. According to the trade data the industries that suffered the most include the leather industry, the footwear, and accessories industry, base metals, vehicles/automotive, manufactured articles, and Original Equipment Components which together account for an estimated 630 000 South African livelihoods.
To recover from the current economic state, there have been many suggestions on what a new post- COVID economy could look like, as the country emerges from this crisis. Perhaps some have attempted to politicize the crisis. What can one make of the recent ANC Economic Policy document? Well, the document is likely to heighten concerns about state intervention and to some signals that the governing party does not have a response to the country’s immediate challenges, nor is it particularly considerate of National Treasury’s economic growth plan recommendations.
It is not clear what the process is for the draft in terms of further policy discussions, but for many, the signals have already been sent and markets could take note. Despite the government’s central role in responding to the crisis, this should not necessarily give leeway to a blanketed state-led approach in the future (such as establishing a state-owned pharmaceutical company). The chorus of state intervention has been sung many times in several ANC policy documents. One can speculate that this may be an opportunity to usher in the ANC’s long-term agenda under the guise of a health crisis when, frankly, there are more urgent matters at play.
In most of Quentin Tarantino’s films, the seemingly loose ends and subtle references all come crashing together in a colossal finale and one must wonder if 2020 is the climactic year for South Africa. The global recovery trend is expected to be U-shaped and the pandemic will likely remain with us for the foreseeable future complicating matters further. It is still too early to tell which type of recovery South Africa or Africa will take, or how long the tail will be, but the stakes are high. Current economic hardships are likely to persist until late 2020, stretching into 2021, and the effects of the global pandemic are going to be worse than those of the Global Financial Crisis. Fortunately, we are through the worst of it and have started the process of embracing the new normal; now it is a matter of getting to terms with it.
[1] The Economist Intelligence Unit, Global growth and geopolitical outlook, June 2020
