Shocking GDP figure undermines Ramaphosa’s economic reforms

If newly-elected President Cyril Ramaphosa needs a reminder that it is time to accelerate a clear reform programme, he needn’t look any further than the withering economy, which shrunk by an astonishing 3.2% in the first quarter of 2019.

This sharp decline, the largest in 10 years, also means that the economy has not moved in size compared to this time last year, registering muted growth year on year.

Double whammy

“You know, South Africa was really hit by a double whammy,” says political economy analyst David Silke, adding that the first quarter’s statistics were a reflection of a weak economy that was exacerbated by load shedding in February and March 2019.

The figures published by Statistics South Africa on Tuesday show that the manufacturing and mining sectors were the leading contributors to the economic dip.

Seventy percent of the manufacturing divisions recorded negative growth in the first quarter of the year – dragging the industry’s growth down by 8.8%, with this drop accounting for 1.1% of the decline in GDP growth. Mining and quarrying contributed a decline of 0.8% to the negative growth seen in the quarter as the industry as a whole shrank by 10.8%.

“This is the largest decline since the global financial crisis in 2009 which led to a global economic meltdown,” said Statistician-General and head of Statistics SA Risenga Maluleke.

In the first quarter of 2009, the economy declined by 6.9%.

Maluleke told media on Tuesday that the series of power cuts which, at their worst, saw Eskom remove 4 000 megawatts of power from the grid for consecutive days in March, “definitely” contributed to the declines in these sectors.

Decisive leadership needed

The decline in the economy was not necessarily a surprise, but the quantum of the decline was. The country was already coming off a low base of 0.8% growth in 2018, dipping into a recession in the first half that year.

The first quarter of 2019 saw economists and institutions reducing South Africa’s growth forecast to between 1.2% and 1.5%.

One could interpret the decline as being far worse than the contraction seen in 2009 because it is purely as a result of domestic issues, says Silke. “It just shows how inadequate[ly] our own economy has been managed in the last decade or so.”

South Africa’s weak economic state is due to a number of factors but there is general consensus among analysts and rating agencies that the lack of clarity on how government plans to restructure key aspects of the economy has had a significant negative impact.

Steel and Engineering Industries Federation of South Africa (Seifsa) chief executive Kaizer Nyatsumba says the disappointing figures indicate that the optimism widely known as ‘Ramaphoria’ that came with the president’s ascendency to the Union Buildings may have been misplaced. He says Ramaphosa and his government need to show bold and decisive leadership to turn the economy around.

Merely talking about a new dawn without having the courage to tackle the country’s myriad challenges will not suffice,” says Nyatsumba.

Accelerate reform and improve confidence

The ownership and sustainability of state-owned enterprises (SOEs), particularly Eskom and South African Airways, remain key economic concerns.

The two loss-making entities carry worrying debt levels of close to R500 billion and in the past two weeks have seen their stability further threatened with both of their chief executives resigning. Both cited, among other concerns, a lack of support and political interference in their attempts to turn the institutions around.

In addition to eliminating the costs of running inefficient SOEs, Silke says the country needs to institute reforms that will encourage foreign investment, such as an attractive tax regime to incentivise investors to commit capital to the country. He says the country needs to ensure more streamlined labour laws and successfully eliminate the red tape and bureaucracy that plagues small-and medium-sized enterprises.

An indicator of the lack of investor confidence can be seen in the gross fixed capital formation, which declined by 4.5% in the first quarter, marking its fifth consecutive decline. “The main contributors to the decline were transport equipment, construction works and non-residential buildings,” said Maluleke.

The only sectors that recorded positive growth were finance, real estate and business services (1.1%), general government services (1.2%) and personal services (1.1%).

“The magnitude of this should be a wake-up call for all those in government and across South African society to find common ground and compromise in order to kick-start new best practice economic policy in SA,” says Silke.

South Africa running on empty

A PwC report gauging the state of the South African economy through a look at key indices and economic indicators found that the country’s “economic momentum is in the red, like a fuel tank running on empty”.

The report’s evaluation of the ‘economic stimulus and recovery plan’ launched by Ramaphosa in September last year revealed that the majority of the outcomes were still stuck in “neutral or first gear”.

“President Ramaphosa will need to consider this economic crisis when he delivers his [state of the nation address] on June 20,” says the report.

“There are enough suggestions – most recently from the International Monetary Fund and South African Reserve Bank – on the structural reforms needed to get the South African economy into a higher gear.

“The president and his new cabinet will need to act soon.”

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