‘SA economy is stuck’

Even if the South African Reserve Bank (Sarb) decided to cut interest rates by 25 basis points on two more occasions in coming months, it would probably not materially change the lack of confidence stifling the economy, a leading economist has argued.

“It is unlikely that that on its own will lead to strong economic growth, because you are not dealing with the key thing that is undermining the confidence, which in our mind relates to political uncertainty and policy uncertainty,” STANLIB chief economist Kevin Lings said.

The slowdown in consumer price inflation continued on Wednesday, with headline inflation slowing to 4.6% year-on-year in July from 5.1% in June. In line with improved inflation prospects, the Sarb lowered interest rates for the first time in five years in July, but concerns about GDP growth remain after the economy slipped into a technical recession during the first quarter.

Even though businesses were in good financial shape, South Africa was experiencing an investment recession due to a lack of confidence, Lings said.

“With an investment recession it is going to be difficult to grow this country in terms of adding jobs, because businesses are not expanding.”

“South Africa is trapped. We are trapped in a low-growth environment caused fundamentally by a lack of confidence.”

Lings said the country’s poor economic performance could not be explained by global events, but were a culmination of internal factors systematically chipping away at confidence – including political infighting, the Gupta e-mails, the sense of corruption and the problems with South African Airways.

“What we think in a nutshell is that the politics of this country is destroying the confidence of this country.”

Given the improved outlook for the world economy, South Africa should be growing at between 2.5% and 3%, but is only expected to expand by around 0.6% or 0.7% this year, he said.

If consumer confidence remained under pressure, retail sales would likely remain sluggish. Consumer spending represented over 60% of the country’s GDP.

Under normal circumstances one might expect government to spend more money to improve the growth situation, but South Africa’s credit rating was already lowered to junk status by some ratings agencies and it is running out of money. VAT receipts are under pressure and tax revenue is falling behind budget, Lings said.

Another option is for government to borrow more money, but in a junk status environment, it risked further downgrades if it can’t meet its expenditure and debt projections, he added.

“This economy is stuck. It is truly stuck.”

The answer is to boost business confidence, he argued.

“Start to clarify policy. Start to make firm, strong statements around land rights, around the Mining Charter, around debt forgiveness, around National Health Insurance – a whole range of issues that have created uncertainty.

“Get strong convincing statements that we stick to and give business clarity and confidence and then discuss with business how government and business go forward. We think business would then invest. We think business’ balance sheet is good.”

Although the economy is experiencing an investment recession, the decline is modest relative to the total, Lings said.

Companies ramped up investment during the boom times and have decided to maintain those assets in good working order. To keep assets functioning optimally, businesses had to keep investing.

“We are still doing that, which means what? [It means that] business believes in the long-term outlook for South Africa. You would not do that if you believed there is no long-term future.”

Although the business sector was concerned about the short term, its actions suggested that it is optimistic about the long-term prospects, he added.

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