26/08/2015
Actually, President Zuma, SA's economy has hit the skids.
Less than three months ago, President Jacob Zuma insisted in parliament that SA was "doing very well". Last week, he came close to admitting SA was in a crisis. However, he insisted the country was not alone in experiencing low growth, nor was the problem one of SA’s own making.
The Financial Mail has long warned that the economy is in crisis. But it is as much a crisis of confidence caused by government’s mismanagement of the economy as it is due to global factors like China’s slowdown and the machinations of the US Federal Reserve.
The fact that there are both negative domestic and external forces bearing down on the economy makes its predicament that much worse.
With the mining sector edging closer to a strike, the rand testing new lows, fresh concerns over China’s growth, and the Fed on the cusp of raising rates, there is a real danger that SA’s economy could tip into an outright recession.
Over the past few months, many of SA’s key economic indicators have sunk to levels that suggest SA is headed for long-term economic stagnation, at the very least. Business and consumer confidence are at 15-year lows, worse even than at the start of the 2009 recession.
However, at a press conference on the state of the nation last week, Zuma assured SA that though it was caught up in a wider emerging-markets crisis, not everything was "doom and gloom".
Though conceding that the electricity constraint could shave as much as one percentage point off growth in 2015, he expressed confidence that the economy was still on track to grow by 2% this year and rebound to 3% by 2017.
But with the Reserve Bank having marked down SA’s growth potential to just above 2% from 3.5% a few years ago, and Eskom having just pushed out the deadlines for the completion of Medupi, Kusile and Ingula by two years, it is becoming increasingly unlikely that the automatic upswing built into SA’s official growth forecasts will materialise.
The more plausible view is that SA can expect to bump along the bottom for several more years, growing at 1%-2% a year. Two more years of this desultory performance and SA will have experienced five consecutive years of low growth — the most prolonged phase of weak growth since 1994.
In an update on the SA economy released this week, the World Bank revised down its real GDP growth forecast for SA to 2.0% in both 2015 and 2016 (a drop of 0.5 and 0.8 percentage points, respectively).
Most significantly, it forecasts the SA economy will recover to just 2.4% in 2017 as it expects the electricity situation to improve only towards the end of that year.
"Growth is stuck in low gear due to a combination of external headwinds arising from the fall in commodity prices and slowdown in the Chinese economy and important domestic constraints," the Bank says.
Proof of this lies in the fact that over the past five years, the BBB median country growth rate has averaged close to 4% against SA’s average of just 1.8%. This points to homegrown shortcomings that have been holding the country back, rather than just global constraints.
The president’s failure to recognise this (at a press conference called to show he is not out of touch with the state of the nation) can only dent confidence further.
"I wish he hadn’t continued to blame foreign forces and global issues and continued to say SA isn’t alone is having low growth," says Nomura strategist Peter Montalto. "[It] shows he fundamentally cannot admit to the problem. This is the first step investors want to see, that SA acknowledges that its problems are homegrown."
Pan-African Capital Holdings CE Iraj Abedian agrees. He argues that the economy’s suffering comes from a crisis of business and investor confidence, which primarily stems from government’s mismanagement of the economy.
For instance, he notes that the minister of home affairs has thrown SA’s tourism sector into disarray through the introduction of the new visa regime — at a time when, with the weak rand, it should be fairly humming. "This is a self-inflicted problem that has nothing to do with the global crisis," says Abedian. "Not owning up to the specific damage the cabinet has wrought on the economy was a missed opportunity."
He is unimpressed that Zuma announced that Deputy President Cyril Ramaphosa would head an interministerial task team to review the visa regulations since, like so much of the salvage work assigned to Ramaphosa, it comes after the horse has bolted.
Hopefully the tourism sector has not been irrevocably harmed and will bounce back once more practical travel rules are implemented.
The same cannot be said for SA’s faltering industrial complex.
Even as the president was insisting that manufacturing exports had turned around, Stats SA released data showing that SA’s manufacturing sector had experienced two consecutive quarters of decline, dropping by 1.2% q/q in the second quarter after a 0.5% q/q contraction in the first.
This suggests that overall GDP growth remained below 2.0% q/q seasonally adjusted and annualised in the second quarter. The Reserve Bank has warned SA to expect another dismal outcome when the GDP figures are released next week, roughly equal to the 1.3% recorded in the first quarter.
This means that the economy will have to outperform in the second half of the year to grow by 2% for the year as a whole. This seems increasingly unlikely, given the plummeting rand, rising inflation, tighter monetary policy and impending job cuts in several sectors.
Economists agree that the weakness in SA’s industrial output reflects a number of factors, including low productivity, regular labour disruptions, rising import intensity, weak business confidence and infrastructure bottlenecks, especially in the provision of electricity.
But this handy economic shorthand tends to mask the true horror of the disaster unfolding in SA’s industrial sector.
Henk Langenhoven, the chief economist of the Steel & Engineering Industries Federation of Southern Africa, is surprised that few people have grasped the extent to which the economy is being eviscerated.
The first step to understanding what is happening, says Langenhoven, is to realise that the metals & engineering sector is intimately linked to the fortunes of the mining, construction and car-manufacturing sectors. Any disruptions in activity in any one of the sectors will hurt the others.
For instance, the travails in mining as a result of lower commodity prices, cost pressures and losses have had a very negative impact on demand in the metals & engineering sector.
The latter’s annualised production numbers turned negative in June 2014 and have been negative ever since. In fact, the downward trend is accelerating.
Whether this slide continues depends largely on whether mining is able to sustain production and exports. That’s a big "if" given that, at current prices, more than 40% of the country’s platinum and 31% of the gold mining industry is loss-making.
"Strikes now in the mining sector would be calamitous," says Langenhoven.
"All four sectors are suffering, all are highly energy-intensive and are the biggest employers and biggest export earners. That’s why it’s so serious," he adds. "It seems as if nobody has realised how interlinked these sectors are and how important they are to the economy."
Collectively the four sectors contributed 20.6% to GDP in 2000, but that had dropped to just under 17% by the first quarter of 2015.
At the end of 2014, they together directly employed about 1.45 million people. By the end of the second quarter of this year, Langenhoven expects 67 000 of these jobs to have been shed, based on the sectors’ recent data for production and value added.
He also estimates the contraction in these four sectors will collectively shave 0.7% off SA’s total GDP in the second quarter. But the most worrying factor, he feels, is that these four sectors’ combined trade balance had reversed from a R50-billion surplus in 2011 to an estimated deficit of R70-billion at the end of the second quarter of 2015.
"The metals & engineering sector exports half of its output," says Langenhoven. "If exports don’t recover, half our market doesn’t recover."
Manufacturing and mining have discovered that despite the very weak rand, exporting your way out of trouble is difficult when China’s slowdown has depressed the prices of, and demand for, your key exports, the EU is barely growing and load-shedding occurs frequently.
The motor industry is also in recession, with vehicle sales down 2% in the first half of the year compared to the first half of 2014. The passenger car market has been in decline since mid-2013, reflecting the growing pressure on the highly indebted SA consumer from rising living costs and weak jobs growth.
"If this is not counter-balanced by sustained or growing vehicle exports (so far they have been buoyed by America’s recovery), it could initiate another wave of lower demand for the metals & engineering sector and exacerbate the already bleak situation, with more retrenchments resulting," says Langenhoven.
One of the chief industrial policy goals of the department of trade & industry (DTI) has been to use the public procurement process to reindustrialise SA. But, says Langenhoven, it hasn’t stimulated the domestic economy by anything close to what was expected.
"Government wanted industry to ramp up from tiny volumes to making things like trains in huge volumes overnight. The capacity just wasn’t there." Instead, it has been met in many cases by cheaper Asian imports.
The combination of domestic challenges, coupled with a global steel glut and swelling of cheap Chinese imports, has proved too much for SA’s steel industry. Evraz Highveld Steel, SA’s second-largest steel producer, has been placed in business rescue and ArcelorMittal has put its Vereeniging long steel works into temporary emergency care.
"I think we’ve already lost in the short term and I expect things to get worse and job losses to accelerate," says Langenhoven. "We’re seeing a lot of losses and some of the guys in my sector tell me they can’t service their debts."
Stanlib chief economist Kevin Lings fears things could snowball. Substantial job losses in mining and manufacturing would depress consumption and so further weaken the broader business sector, he explains. The risk is that this causes a self-perpetuating cycle in which companies start to cut jobs more aggressively, forcing the economy ever closer to an outright recession.
Lings’ view is that a recession is not inevitable, but that SA is laying the groundwork for precisely such an outcome. Whether or not the economy actually tips into negative territory, what cannot be denied is that SA has become well and truly stuck in a low-growth environment without any immediate means of escape.
Exports are under pressure, the consumer is on the ropes, business is battening down the hatches, and both fiscal and monetary policy are in tightening mode as the authorities seek to lessen SA’s external vulnerability in the face of imminent Fed hikes.
The World Bank warns that there are downside risks even to its already weak SA economic forecast.
"On the domestic front, if labour relations do not improve or if power disruptions worsen, growth could well disappoint further," it notes in its report. "And if wage settlements continue to exceed inflation and productivity gains, competitiveness will erode, undermining the role of net exports in supporting the recovery."
Consulting economist Cees Bruggemans feels SA is "increasingly harvesting an approaching storm" as the result of years of penalising the economy through government’s single-minded and legalistic pursuit of redress and redistribution at the expense of economic efficiency.
This approach has led to layoffs, weakening the human capital base in the public sector, writes Bruggemans in a recent column. "The cumulative unintended consequences of this can be observed daily."
Only a change of heart can turn this around, he feels. "This does not necessarily mean a shift to unfettered economic logic. Restitution and compensation can remain a major feature of changing SA’s complexion ... but in a secondary, supporting role rather than the sole primary one, as has been the case for too many years now."
Given three wishes, Abedian would reshuffle the cabinet to include more competent people who understand modern economies; abandon government’s statist approach to running the economy (since it has neither the money nor the implementation capability to do so) and instead invite the private sector into a partnership to revive the economy; and have a credible, cost-effective and sustainable energy policy that ends Eskom’s monopoly and involves a greater private-sector contribution.
Old Mutual Investment Management chief economist Rian le Roux wishes Zuma had used his press conference to announce immediate action against underperforming municipalities and government departments. He also would like to see a far more aggressive approach to corruption and wastage and a plan to reduce regulatory burdens, speed up regulatory processes and sort out managerial problems at state-owned enterprises, including replacing dysfunctional managements and boards with qualified, competent people.
For the World Bank, "improved labour relations, matched by greater collaboration between the public and private sectors and policy certainty to improve the business environment, is fundamental to restoring confidence."
It also says SA must get basic education and post-school vocational training right in order to meet the jobs challenge, noting that this will also require more supportive small business policies, like ensuring greater regulatory flexibility.
Montalto counters that it is already too late to fix many things, like preventing the impending job cuts in mining. In any event, what needs to be done is politically impossible under SA’s current style of leadership, he says. "SA is stuck in this low-growth world within the confines of what is politically possible. The foundations are already laid. It’s all well and good bandying around need for labour law changes, improved education and skills and a change of mind-set at the DTI, but it isn’t going to happen."
The idea that SA has already lost the battle is not typically expressed in SA’s public discourse except in hushed asides.
Standard & Poor’s sub-Saharan African MD Konrad Reuss is one of the few to have given it voice. In an interview with the Financial Mail earlier this year he said: "While we believe that government will continue to adhere to controlled fiscal expenditure, we do not believe it will manage to undertake the major labour and other economic reforms that will significantly boost GDP growth."
Moody’s continues to give government the benefit of the doubt a full three years after the launch of the National Development Plan (NDP), despite all the evidence that government is incapable of implementing any of the tough economic or labour market reforms.
"The country is at a crossroads in that it’s stuck in this low-growth trajectory and there are policy choices to make," Moody’s lead SA analyst Kristin Lindow told the Financial Mail in May. "A lot of the growth constraints are domestic in origin. Acknowledging and dealing with it is going to be crucial if SA is to move beyond this period."
So far government’s response to the crisis has been to establish task teams and "war rooms", repackage old plans or promise to "fast-track" things it should have been doing urgently anyway, send contentious matters for further study, and continue to insist it is committed to implementing the business-friendly NDP even as new policies weaken property rights and investor protection.
To be fair, Zuma did announce one new, welcome initiative at the press conference: the establishment of a pilot investment facilitation centre, or One Stop Shop, at the DTI to reduce regulatory and bureaucratic hurdles and fast-track all investment inquiries.
But what government has not been able to do is face up to the root cause of the growth slowdown: that under Zuma’s presidency there has been a progressive erosion of the structural underpinnings of SA’s economic performance and productivity.
A recent BNP Paribas study confirms that large swathes of SA’s once-profitable firms and factories are experiencing faltering turnover, squeezed industry profitability, waning capital replacement ratios and poor returns on assets.
The main culprit, according to the report, is that real turnover growth has barely kept pace with soaring real wage growth and rapidly rising employment costs. The result is that the productivity of many SA firms is in steady decline at a time when global conditions have become increasingly tough.
But supportive micro-policies to raise industry’s competitiveness have been few and far between. Instead, Zuma’s administration has increased the complexity of industrial regulations and presided over a rapid rise in the cost of logistics.
Above all, its distrust of private capital has meant it has failed at the most basic level to make SA a welcoming place to do business.
To compound matters, Zuma’s hands-off leadership style and lack of crisis management have created the sense of an economy on auto pilot with no-one at the helm to arrest the steady slide in its growth potential and creditworthiness.
This was underscored in parliament recently when Zuma revealed that he had no knowledge of impending job losses in mining, or of attacks on the integrity of the judiciary by his police minister, or even of the knee-jerk suspension of Glencore’s Optimum Colliery’s mining licence by his mineral resources minister — an item of huge controversy which has caused confidence in the sector to plumb new depths.
It was ostensibly to repair the damage that Zuma called the press conference a few days later where he assured SA that not everything was "doom and gloom".
On the contrary, SA is busy making the noose for its own neck.
At most, SA has a two-year window to prevent further sovereign credit rating downgrades. The rating agencies have been clear that it will take more than treasury’s continued fiscal prudence for SA to hang on to its investment rating. The country must also prevent any further deterioration in its growth and investment climate, something it is manifestly failing to do.
The World Bank concludes that "structural impediments will continue to weigh heavily on SA’s growth over the next three years" and that "labour relations will remain difficult in an environment of weak growth".
Given this, the Bank expects unemployment to remain "sticky and high", and extreme poverty and inequality to remain broadly unchanged.
The consensus is that the only way to jolt SA out of this low-growth trap is for government to undertake structural economic and labour market reforms.
However, for that to happen will ostensibly require an overhaul of the political leadership. That is at least four years away. If the economy is in bad shape now, what will it look like after another four years of this?
On its current trajectory, SA can expect massive de-industrialisation, macroeconomic instability, and a sovereign rating downgrade to junk status, which could trigger a currency crisis.
A worsening of the growth and jobs situation could also lead to a crisis — either through escalating social unrest, a fiscal crisis or a jump to outright populist policies, says Le Roux.
That is not a happy ending. It is certainly a lot less than SA deserves. But if it materialises, SA will have only itself to blame.
This article first appeared in the Financial Mail
