South Africa: where to from here?

A quick take_The vaccine roll out

What a truly unprecedented year. The ‘lockdown’ recession of 2020 is expected to contract global economic activity by about 4%, the worst decline since the Second World War. For South Africa, which entered the coronavirus (COVID-19) pandemic on an already weak footing, an 8% contraction is being projected.

That, of course, was 2020. In 2021 this hangover will remain with us, but what else can we expect over the next 12 months or so?

With South Africa being such an open economy, it is important to start any assessment of the future by exploring the outlook for the global macro environment. On this score things seem to be changing for the better as certain risks are subsiding.

Firstly, although some countries are still struggling to contain rising COVID-19 cases, the announcement in late-2020 that effective vaccines were ready for production was welcome news. United States (US) biopharmaceutical firm Pfizer and Germany’s BioNTech were first out of the gate with the news, announcing a vaccine with a 95% efficacy rate after just seven months; a truly remarkable achievement. While there are still many unknowns, such as availability, storage and the logistics required to roll-out a vaccine to the world, market sentiment has already swung more positive and this should boost the economic outlook for 2021, especially for the developed world. Emerging countries are, in time, also likely to follow.

It is expected that we are might enter an early cycleThe US election outcome was, similarly, taken as a positive by markets. The narrative was that a Joe Biden win, along with a Republican senate, should still boost economic activity with further fiscal stimulus (less so than under a blue sweep). This combination would also limit the tax hikes and increased regulation which the Democrats wanted. As things transpired after the Georgia Senate run-offs in January, the Democrats took effective control of the Senate too – for the first time since 2014. The markets also responded to the widely held expectation that President Biden would also prove more diplomatic and transparent with regards to international relations.

It is, therefore, expected that we might enter an early cycle recovery in global activity which should boost commodity exporting countries such as South Africa. The US dollar, being a counter cyclical currency, is expected to weaken further against other global currencies. China, on the other hand, has recovered very well since the second quarter of 2020 and is expected to continue to grow at about 8.5% in 2021.

So, from a cyclical point of view, South Africa finds itself in a more favourable position than it was just a few months ago – despite the continued challenge of keeping new cases low and worrying fatality figures in a number of the provinces. In terms of economic activity in the third quarter, this has beaten expectations after the economy reopened following stringent lockdowns. We expect the South African economy to grow by 3% in 2021, while inflation should remain muted at around 3.5%. This should allow for interest rates to remain low by historical standards.

Time to apply critical fixes

Against this backdrop, South Africa finds itself in a position to really take advantage and turn its focus to the structural issues facing the nation.

On this score, however, progress has been very slow. Although, some recent positive developments have been made, including:

  • The approval, by the National Energy Regulator of South Africa, of 12 000 MW in renewable energy pipelines.
  • The Independent Communications Authority of South Africa fast-tracking the roll-out of spectrum.
  • Improvements within the justice system with many arrests being made by the National Prosecuting Authority, with cases being built prior to these arrests.
  • The rebuilding of capacity within the South African Revenue Service.
  • Following the Mining Indaba, the removal of obstacles to get regulatory approval of mining exploration.
  • The release of 700 000 hectares of state-owned land for farming.

South Africa’s trade balance has also been a positive surprise over the last few months, putting less strain on the country’s current account deficit. These are all steps in the right direction, but much more needs to be done, and with more urgency, to increase our potential growth rate and avoid a fiscal cliff.

This is where the 2020 South African Reconstruction and Recovery Plan steps in, with its aim of reshaping the economic landscape. This plan, together with others, is a step in the right direction. But implementation will be key. And time is running out.


Source: South African Reconstruction and Recovery Plan, 2020

To understand why the situation has become critical, it is necessary to look to the October 2020 Medium-Term Budget Policy Statement (MTBPS). South Africa is currently on a path towards a fiscal cliff, and we urgently need to change direction if we are to avoid this trajectory. Rating agencies (Fitch and Moody’s) have already responded by cutting the country’s credit ratings even further, and S
tandard & Poor’s will soon join them if implementation is slow or absent. Our debt-to-GDP is expected to grow to 95% within the next five years. The main budget deficit is expected to be 14.6% of GDP in 2021. These numbers will only be achieved if R300 billion of non-interest spending cuts are implemented, with much of this coming from public sector wage cuts.

Fair value grey block

Although it is right to cut wages, implementation risk remains high. No wonder South Africa’s Finance  Minister Tito Mboweni ended his MTBPS speech with a quote from the Bible: “You are going to have the light just a little while longer. Walk while you have the light, before darkness overtakes you. Whoever walks in the dark does not know where they are going.”

How is SA positioned for 2021?

Despite ongoing challenges, 2021 is certainly shaping up to be a much better year for South Africa than 2020. That said, COVID-19 risks will still be around for a while before we see the roll-out of a vaccine. The government’s commitment to containing the wage bill will be a key factor to watch over the next few months. Certainly, winning this battle should improve sentiment and send a clear message that the government is committed to fiscal consolidation. Implementation of structural reforms will also be monitored closely.