SA’s economic underperformance ‘self-inflicted’

While South Africa’s economic fortunes are closely linked to the health of the global economy, its current underperformance is self-inflicted, a leading economist has argued.

Speaking at a Liberty Corporate Employee Benefits Symposium, STANLIB chief economist Kevin Lings said while the performance of the global economy helps to explain why the South African economy is not growing at 3%, growth of close to 0% is the country’s own doing.

“We inflicted that on ourselves. It’s not the world economy. The world economy yes, doesn’t make it useful or helpful for us, but this gap to the downside [South Africa’s underperformance relative to the world economy] is unusual. That means it is within our power to change it.”

The explosion in government debt since the global financial crisis is one of the main reasons for the economy’s underperformance, Lings argued.

Back in 2009, government debt was 26% of gross domestic product (GDP) and South Africa was in the most powerful position it has even been. But since the global financial crisis, government debt has risen to almost 50% with the country’s credit rating also coming under pressure.

Lings said South Africa borrowed R826 billion over a period of six years. This number only refers to central government debt and excludes the money borrowed by Eskom, South African Airways, Sanral and other state-owned enterprises.

But despite this massive fiscal stimulus, the economy is struggling to grow at 1%.

One of the big-ticket items in the South African budget has been government salaries, with the salary bill effectively doubling in five years.

This is one of the reasons retail sales have experienced a phenomenal performance and retailers’ share prices generally benefited. At the same time, however, South Africa manufactures the same volume of goods it did 15 years ago. A significant portion of consumer goods is imported, which has been a drag on economic growth.

How to get the economy growing

Lings argued that South Africa would need to leverage its balance sheet to get the economy growing.

All countries have three balance sheets – household, government and corporate balance sheets.

Leveraging the household balance would require consumers to go shopping using credit and while the economy would grow faster, it would end in tears.

“The balance sheet is not that strong for the household sector. We don’t have the savings pool.”

Most countries perpetually use the government’s balance sheet – it is usually the strongest and can make the biggest impact.

Lings said when most countries are floundering they turn to the government for help.

“The problem for South Africa is that our government debt is at the point of junk status. We can’t leverage the government balance sheet. If we did, we are junk status.”

This only leaves the corporate balance sheet.

Lings said the Bank for International Settlements recently published a survey that concluded that one of the biggest risks in the world is high corporate debt in emerging markets, but flagged a couple of exceptions. South Africa was one.

“South Africa’s corporate balance sheet is big. It’s strong. In my mind it’s well managed. It’s underleveraged. It’s got good profitability.”

The challenge is that the corporate balance sheet lacks confidence.

South Africa can get the economy growing by inspiring confidence that would convince corporates to use their cash piles to invest in infrastructure, Lings argued.

But while it is very easy to find ideas to grow the South African economy, it is much more difficult to find ways to grow the country in a politically acceptable way, he said.

Lings argued that corporate balance sheets should be leveraged through public-private partnerships in the same way this was done with the independent power producer programme.

He said comments made by National Treasury early in May suggest that finance minister Pravin Gordhan agrees this is the way forward.

“Unfortunately that has all been lost in the political noise and it is very clear to me that if we want to move ahead with any of these initiatives, we need, more than anything, the political will.”

Lings said that, at the moment, that political will to grow the country is not there.

“But without the right political will it is difficult to move this country forward, which means South Africa steps closer and closer to [a] credit rating downgrade… If we continue business as usual, which means what we’ve seen, we’ll be junk status.”

He said if South Africa started to exhibit higher growth and broke away from the pattern exhibited by the rest of the world, it would attract more than its fair share of foreign interest.

“The hurdle rate to achieve that is the lowest it has ever been.”

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