THE ECONOMY – QUO VADIS SOUTH AFRICA?
President Zuma’s dismal performance the National Assembly on Thursday 6 August where his answer too many questions was “I did not know” and final question that South Africa was getting along just fine and that “this is a well-governed country” left many commentators bewildered about the counties future.
After Zuma insisting that SA was “doing very well” he had to call a special media conference on Tuesday 12 August to report progress since his February State of the Nation Address. At this media conference, he came close to admitting SA was in a crisis. However, he insisted the country was not alone in experiencing low growth, nor was the problem one of SA’s own making. President Jacob Zuma claimed that the state of the economy it’s not all “doom and gloom”.
The result was the rand falling to its softest rate of 12.93 to the US Dollar close to its all time low of 13.82 on 20 December 2001. On 24 August the Rand briefly reached a new low against the dollar of 14.06. The JSE All Share index dropped a massive 3.16% to reach a level of 47 631 on 24 August well below its all time high of 55 188 reached in April this year.
At the weekend the Rand/Dollar exchange rate and the JSE All Share Index have clawed back some of their losses and are at 12.82 and 49 967 respectively. Most economists do not believe that this will be a long term recovery. After reaching an all time low in December 2001 President Mbeki introduced the Growth, Economic and Redistribution (GEAR) programme and in 2009 when President Zuma assumed office the Rand/Dollar exchange rate was 7.76.
This week SA has seen the real Gross Domestic Product (GDP) decrease by 1.3% in the second quarter of 2015 this suggests that there is now a real danger that the economy may slip into recession resulting in further job shedding.
The economic slowdown means that the projected economic growth will fall below the 2.0% projected by the National Treasury, well short of the 5.4% percent envisaged in the National Development Plan.
This will impact negatively on revenue collection. The South African Revenue Service (SARS) reported this week that revenue had fallen short by R2.94 billion, or 0.9% percent of the revenue collection target, in the first quarter of 2015. The economic downturn will lead to an ever-shrinking tax base reducing funds, hampering government’s policy of eliminating poverty.
The Financial Mail and other economists have long warning that the economy is in crisis. This crisis of confidence is caused by government’s mismanagement of the economy together with other global factors like China’s slowdown and the uncertainty of the US Federal Reserve’s stance on interest rates.
Because there are both negative domestic and external forces bearing down on the economy the predicament is much worse. Government’s proposals to turn the economy around treat the symptoms rather than the causes. They include:
- Embarking on a programme to build Nuclear power stations;
- Promoting greater beneficiation of raw materials;
- Choosing 100 potential new industrialists to promote expansion in the manufacturing sector;
- Expanding the drilling for oil project off the South African coastline and also fracking in the Karoo;
While having benefits they are impractical, the beneficiation of raw materials and expanding the manufacturing sector require electricity now and not in 2030 when the nuclear power stations will be completed, Medupi Power Station is currently four to five years behind schedule. The nuclear programme costs remain prohibitive with estimates of over R1 trillion. The offshore drilling and the fracking proposals are badly timed. In July 2015, it was reported “a hush has fallen over SA’s oil and gas exploration as plummeting oil prices coincided with a lack of progress in creating attractive legislation for the oil and gas sector”.
A determined action plan to rectify the structural problems facing the South African economic slowdown and possible recession is required to lead to prevent further job shedding and increasing 7.6 million people looking for work in South Africa.
There are policy options available to tackle the fundamental roadblocks to economic growth; these include policy uncertainty, the energy crisis, inflexible labour laws and labour militancy, failing parastatals, visa problems and red tape in obtaining funding and state incentives.
Steps that can be taken in the short term are to:
- Offer tax incentives to companies willing to invest in producing power for their own use and are able to sell their excess production to the national grid and expand the quantity and size of the IPP’s, independent power producers, to ensure that new sources of power resources are built quickly and on budget;
- Adopt and implement the long overdue bill which would remove the electricity transmission grid from Eskom and place it in a separate entity and privatise sections of Eskom through the sale of equity to the private sector, government can retain the majority shareholding;
- Revise the visa regulations to provide for the obtaining of biometric data on entry into the country;
- Create a “One stop shop” where prospective investors can obtain information, all the required documentation and permits to establish a new business in the country;
- Establishing Job Zones near ports and airports, and in rural areas, to attract investment into industries that employ many people;
- Introducing a real Youth Wage Subsidy to address high levels of youth unemployment. The current Employment Tax Incentive (ETI), has failed to provide young South Africans with job opportunities;
- Repeal and amend laws that reduce international and local investment through threats of nationalisation and limitations on foreign ownership;
Failure to take immediate action would result in a full blown recession reducing employment and decreasing the tax base. The country cannot sustain an economy where government wages are up 40% since the Great Financial Crash of 2008. Latest figures reveal that the number of South Africans who benefit from social grants has more than doubled from 12.7% to 30.2% over the past 10 years and the percentage of households in South Africa that received at least one grant increased from 30% in 2003 to 45.5%. Grants are an important safety net for persons living in poverty but the better solution is to create an environment where permanent jobs are created.
This cannot be sustained with the narrow South African tax base. Research shows that in South Africa only one in ten adults pay personal income tax to an amount worth mentioning this is also applicable to other forms of tax in the country. According to a quarterly Labour Market Report by Solidarity, compiled in collaboration with ETM Analytics, only 3.3 million out of a total 33 million eligible tax payers in the country pay 93% of all personal income tax. Worse still, only 3.7% – or 1.1 million people – pay just short of 70% of the total income tax received. Out of a population of 55 million people, of which about 30 million are of working age, a mere 1.1 million people pay 70% of all personal income tax.
Government seems oblivious of or does not care about the situation. Just this week Speaker Ms Mbete responded to a request from James Vos MP for a debate of public importance on the impact that the newly promulgated visa regulations are having on our economy and jobs by stating that a debate in terms of Rule 103 should be of “sufficient immediate public importance to give it precedence over other programmed business”.
Obviously the Speaker believes job losses are not important. The impact of the new visa regulations on the economy in 2014 was a negative R2.6bn and a loss of more than 5 800 jobs according to an impact assessment report by Grant Thornton, commissioned by the Tourism Business Council of South Africa.
The report predicts that in 2015, the number of lost foreign tourists due to changes in the immigration regulations is likely to decrease to 100 000, with a loss of 9 300 jobs and a net loss to the South African GDP of around R4.1 billion. Job creation is also in danger… According to the Tourism and Business Council of South Africa, every sustained increase of 12 tourists to SA, creates one new job. Therefore the industry’s ability to create jobs is being severely undermined.
A grave concern is that government is not taking seriously is the decision by the US congress to launch an “out-of-cycle” review of South Africa’s trade practices and its commitment to market principles which could result in the country losing some, or all, of its benefits under the African Growth and Opportunity Act (Agoa). Last year alone AGOA was responsible for $1.7 billion in export revenue for South Africa.
The review will examine whether South Africa still qualifies for benefits under the US generalised system of preferences, eligibility for which is a precondition for enjoying Agoa preferences. This, according to the Federal Register notice, “includes requirements that the country is making continual progress toward establishing, inter alia: a market-based economy; the rule of law, political pluralism, and the right to due process; the elimination of barriers to US trade and investment; economic policies to reduce poverty; a system to combat corruption and bribery; and the protection of internationally recognised worker rights.”In addition, the country may not engage in activities that undermine US national security, foreign policy interests or engage in gross violations of recognised human rights.”
It does not bode well that in recent years our government has flirted with policies that tamper with property-rights, intellectual property protection, and investor protection. Our handling of the Al-Bashir case does not reflect on our protection of human rights or our commitment to the rule of law. If we are excluded from AGOA, the ANC government will only have itself to blame.
It will not go unnoticed in Washington that President Jacob Zuma picked Rob Davies and Ebrahim Patel to run the economy. Both are members of the SACP. Mr Davies is a member of the central committee of the South African Communist Party, in whose name the African Communist recently published a “political report” declaring the Agoa eligibility conditions are an “imperialist” effort to impose “neo-liberal policies”. Nor will the decision of a minister to revoke a mining licence at the drop of a hat be looked on kindly
The ANC and SACP do not realise the fact that our relations with China now mirror old colonial trade patterns. We ship raw materials to China and they export finished goods back to us, whereas the Americans import 60 000 cars made in SA a year.
Government should not rely on our BRICKS partners to solve our economic woes China’s economy is grinding into a lower gear, growing at the slowest pace in nearly a quarter-century. Scandal-plagued Brazil stands on the edge of recession. A cliff dive for oil prices, sanctions, and the poor political choices of its leaders have Russia’s economy on track to contract 3.5% this year.
India is the jewel in the BRICS crown growing at over 7% since the election of Narenda Modi as Prime Minister. The government has now introduced a number of far reaching initiatives to grow the economy. Firstly it has set up a Bank Board Bureau to allow professional management to be appointed to run the heavily indebted state controlled banks as a board-managed company rather than being run by the government. That will address a lot of the issues facing the banking sector.
A national investment fund for infrastructure in India is being established. Government is going to allocate about $3 billion a year and also raise funds from the private sector, both domestically and globally, to invest in infrastructure. This should see significant money pouring into India’s economy. A third initiative is the auctioning of national resources in a transparent manner. Government has auctioned off coal resources and the telecom spectrum. That gives the government cash and will increase transparency for investment in those sectors.
Following representation from NUMSA and ArcellorMittall (Indian owned) and Evraz Highveld (Russian owned) the government has this week imposed import levies on imported steel in order to save the South African steel industry and thousands of jobs. As most of our steel imports come from China our new ‘friend’ is not going to be happy.
If I was our government I would remember Bill Clinton’s election slogan in 1992 “The economy, stupid”! They must forget old failed ideologies and concentrate on what is best for South Africa. Ironically the country, in which the financial crisis first emerged, the US, is in fact staging a powerful recovery. Its growth is up, unemployment is down, its currency is surging, and the US economy “creates broad spaces” for “innovation and enterprise”. An example we should follow.
Until next time,
CLIVE HATCH
This newsletter is published by Clive Hatch former Leader of the Opposition in the Mpumalanga Provincial Legislature and former DA Provincial Leader. These views are my personal views and do not represent those of any other person or organisation.
