Defend Truth


An election in a time of economic decline


Nazmeera Moola is Head of SA Investments at Ninety One.

It's a week before the general election, and it's worth taking stock of where we stand economically. The economic has broken down and what is needed to get the jalopy back on the road again is a shot of confidence.

A week before the South African national general election seems like an appropriate time to consider the state of the South African economy.  The evidence on the ground is pretty bleak.  Uber drivers talk about Easter weekend being deathly quiet because Easter fell before pay day this year.

Tenants are struggling to make rent payments.  The private sector is shedding jobs, instead of creating them.  Skilled people of all races are talking about seeking opportunities elsewhere in the world.

The looming election provides us with an opportunity to assess the cold hard facts of the Zuma presidency.  A decade ago, South Africa was dealing with the fall-out of the Global Financial Crisis.  Global growth was in freefall.  Commodity prices were plummeting.  Local growth was contracting.  The rand had weakened sharply.

However, South Africa felt like a good place to be.  It was one of many emerging markets that were expected to fare better than developed markets in the decade ahead.  The country was about to host the 2010 FIFA World Cup.  Growth had averaged 4.5% for the previous five years.  SA’s balance sheet was strong.  Government net loan debt bottomed at 21.8% of GDP in the fiscal year ending 31 March 2009.  Skilled South Africans were returning home, bringing their valuable offshore work experience with them.

Ten years later, and government debt has more than doubled to 50% of GDP in the latest year ended 31 March 2019.  More worryingly, it is projected to continue rising towards 60% of GDP over the next 5 years.  Government wages consume a growing and unsustainable share of South Africa’s GDP – particularly as service delivery has gone backwards over the last decade.

Beyond the national government debt, in March 2009, Eskom’s borrowing totalled R74.7bn.  By March 2019, this had risen almost six-fold to R419bn.  A host of other state-owned companies, including SAA and Denel, have been mismanaged and looted in the last ten years.

In addition, the South African corporate sector has been rocked by a series of scandals, most notably the collapse of Steinhoff in December 2017.  This has left the average South African wondering if anyone is trustworthy.

Cumulatively, this has led to a steady erosion in confidence.  And this lack of confidence is the root of the problem.  Household cash deposits at banks are near 40% of personal disposable income.  This is the same level as we saw in 1991.

In 1992, my mother was worried about a potential civil war and stockpiling baked beans and sanitary pads.  The consumer today is currently behaving in a similar manner to when the country was fearing a civil war?  How is that possible?

The bottom line is that an injection of confidence is badly needed.  Without higher consumer and business confidence, neither consumer spending or business investment will grow.  Without these. overall GDP growth will remain anaemic.  Growth at sub-1% per annum is insufficient for South Africa to stabilise the current debt burden.  (We have not even begun to discuss the enormous social burden that can only be addressed by massive job growth for the unemployed youth.)

The starting point to improved confidence is government reforms.  These need to address two broad streams.  Firstly, South Africa’s public sector balance sheet needs to be stabilised.  This involves cutting expenditure, which unfortunately means jobs, and improving management.  Secondly, confidence is required.  Some moves to prosecute the glut of corruption that the various commissions of enquiry have unearthed will go a long way to providing reassurance to a disillusioned populace.  Eskom needs to be operationally steadied.  Nothing kills confidence like level 4 load shedding!

Adjusted for inflation, GDP per capita peaked at R50 815 in 1980.  It then proceeded to grind lower for thirteen years, bottoming at R42 386 in 1993.  (Remember that we are adjusting for inflation!)  It took until 2006 for GDP per capita to surpass the 1980 level before it peaked at R56 549 in 2014.  It has been slowly moving lower by about 0.5% per annum since then.  Without significant reform that triggers growth, South Africa will have another lost decade – as we saw in the 1980s.  A change is needed.  Is the ANC functional enough to deliver this? DM

Nazmeera Moola is the Head of Investments, Investec Asset Management


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