After the cabinet was announced last week, a friend of mine who owns several retail stores called to ask me: “Is it enough?  Is it enough to get growth going?”

Growth has been pretty bleak in recent years, shambling along at around 1% per annum.  Even so, the size of the contraction in GDP that took place in the first quarter of 2019 came as a bit of a shock.  On an annualised basis, GDP contracted by 3.2% quarter on quarter. The Bloomberg survey had a consensus forecast of -1.6% quarter on quarter – this was substantially worse!  

This is the largest quarterly contraction in GDP since the aftermath of the Global Financial Crisis in the first quarter of 2009.  It is the second largest quarterly contraction in GDP since the 1980s. Very worryingly, this is almost entirely self-induced. We cannot blame this on a global crisis: rather, the reasons behind this massive contraction in growth lie in South Africa.  

Looking at the data, the contraction is due to a combination of four factors.  The first is load shedding, with the bulk of the impact in February and March. Stage four load shedding accounted for a large proportion of the deep annualised declines in manufacturing, utilities (not surprising, given the lack of electricity supply), the transport and communication sector and the wholesale and retail trade (remember all the dark and shuttered shopping malls).   This was the first quarter since the first quarter of 2016 that consumer spending contracted. The mining sector also recorded a very large decline, although load shedding was not the whole story.

This brings us to the second cause: the five-month strike at Sibanye caused production to grind to a halt and intensified the problems in the mining sector.  

The third factor was poor confidence.  This no doubt exacerbated some of the load shedding-related drops.  However, the clearest demonstration of the poor confidence was the contraction in construction – and subsequent 4.5% quarter on quarter annualised fall in investment.  This reflects not only a private sector that is reluctant to invest given the uncertain regulatory environment but is also due to state-owned enterprises such as Eskom and Transnet, where investment has slowed dramatically as their past misallocations of capital are examined and cash flow remains under pressure.  

The fourth and last factor was the late rain season, which resulted in poor maize plantings in the north and manifested in a double-digit contraction in agriculture.  

The result of the first quarter contraction is a deduction of about 0.3-0.4 percentage points from full-year GDP forecasts, which are now likely to be tracking around 1%.  Worryingly, the anecdotal company interactions suggest that this weakness persisted into the second quarter of 2019. 

This has a knock-on impact on the budget deficit.  Bear in mind that the Treasury had forecast 1.5% growth in the February 2019 budget.  This raises the risk to their revenue forecasts.  Together with the increased transfers to Eskom and likely SAA, it explains why budget deficit forecasts for the current fiscal year (ended 31 March 2020) are now tracking towards 6%. 

To come back to my friend’s question, I’m not sure if Cyril Ramaphosa’s recently announced cabinet is enough to boost South Africa’s growth.  The long steady decline in South Africa’s potential GDP growth is primarily due to a lack of investment by the private sector and the massive mis-investment by the public sector.  If you are unsure what the latter means, think for a moment about the colossal amount of money that Eskom has desecrated on Medupi and Kusile.

The private-sector frugality is due to policy uncertainty, notably in telecoms, mining and land rights and the insecurity of electricity supply.  The public-sector wastage is due to the diversion of funds and the persistent hollowing out of so many state institutions, including many government departments, the South African Revenue Service, SAA, Eskom and the National Prosecuting Authority.  

The result is a bureaucracy that focuses on box-ticking and managing downside – and not on supporting growth.  President Ramaphosa’s cabinet will only be successful if they can reverse this decline and thus move South Africa’s Ease of Doing Business score from its current lowly rank of 82nd towards the 44th it enjoyed in 2007.