South Africa’s growth momentum is a bit like wading through a sea of golden syrup. Or maybe coagulating blood – sluggish and sticky. And it’s not clear how we get out of it.
Growth has been plodding along at 0.5% to 1.5% for the last five years. This is insufficient for South Africa in many ways.
Growth of sub-1% means that South Africa is not creating jobs. This is particularly problematic for young people. In the first quarter of 2019, the youth unemployment rate for those aged 15 to 24 years was 55.2%. For the next age group up, those aged 25 to 34 years, the unemployment rate was 34.2%. Aside from the loss of productivity of half a generation of people, a side effect of this dire state of affairs is a rising crime level. After declining steadily since 1993, when murders in South Africa peaked at 77 per 100,000 people, the murder rate bottomed at 30.1 in 2011. It has been climbing steadily since then.
Growth of sub-1% also makes South Africa’s fiscal balance unsustainable. Slow growth means government revenues will remain under pressure. Add in the Eskom debacle, and the consolidated deficit looks set to reach around 6% of GDP – that is the highest level since the Global Financial Crisis. Prior to that, these levels of deficit were last seen in 1992-1994. In fiscal terms, South Africa is back to the crisis that precipitated South Africa’s transition to democracy.
The solution to the growth problem is a restoration of confidence. There has been a profound deterioration in confidence in South Africa.
In the household sector, this has manifested in the build-up of cash balances in higher-income groups. Household cash on deposit at banks amounts to 24.2% of GDP and is now back at 1993 levels. This is reflected in the persistent contraction of car sales and weakness in the mortgage market.
I had lunch recently with a very successful business leader who has a history of producing excellent, sustainable returns in the local economy. He told me that he has not been as worried about South Africa as he is right now, since 1992.
Despite the persistent downgrades to corporate profits in recent years, corporate cash levels as a proportion of GDP are about 39%. This is rather high and indicates that there is the ability to invest by at least some companies if the environment improves.
The catalyst to improved confidence is reforms. Despite a very favourable election result, President Cyril Ramaphosa’s government has yet to produce any tangible progress. According to the latest Bank of America Merrill Lynch fund managers’ survey, the net proportion of domestic and global fund managers who are active investors in South Africa who expect to see government reforms accelerating has declined from 33% in April this year to 0% currently.
The growing expectation is that the Eskom bailout announced by the National Treasury will not be accompanied by any operational reforms. Therefore, the financial bailout will not result in a long-term solution, but only present a short-term band-aid that will quickly prove inadequate to staunch the bleeding.
Then there is the problem the President faces on two key ANC policies – notably land expropriation without compensation and national health insurance. Both issues resonate with much of South Africa’s population due to the country’s critical housing shortage and awful public health care. Unfortunately, both policies have become weaponised by those opposed to Ramaphosa’s fight against corruption, people who are pushing these unworkable agendas without first fixing underlying problems.
The Presidential Panel on Land Reform and Agriculture recently published its report. They noted the need to tackle the land issue to address both land hunger and housing issues. However, buried in the report was a comment that a necessary pre-requisite for land reform was a capable state.
The recently published National Health Insurance (NHI) Bill also requires a capable state.
We could view the Bill as providing a workable framework to healthcare reform, with an incremental implementation strategy. The lack of clarity in the Bill means that we could optimistically see room for private health insurance to provide an alternative to NHI for those that do not follow the NHI pathways. An alternate interpretation is that the only route for a range of medical cover will be through the NHI. Given the country’s experience with the government’s current provision of land reform, healthcare or electricity, few are likely to assume that a capable state will be created by 2023.
Instead, most will continue to defer spending. And many with skills – particularly much needed medical skills – will look to emigrate.
Therefore, despite its very laudable and necessary long-term aims, NHI will hurt growth in the short term, exacerbate job losses and threaten short-term stability. DM