South Africa faces a plethora of challenges and will need to bounce back soon to prevent it from spiralling out of control. The question we constantly grapple with is whether it can bounce back from its current economic challenges.
Many Idols contestants really, really want to win — but the reality is that most simply do not have what it takes.
South Africans have developed a reputation as a resilient people with a can-do attitude and the country has shown a remarkable ability to bounce back from challenging situations in the past.
Can it do so again?
Does this ability to bounce back wane over time?
There is increasing evidence that our ability to bounce back has been eroded. This economic resilience we’ve shown in the past seems to be fading.
The challenges the country needs to bounce back from are many — low economic growth, low employment (particularly among the youth), a high cost of living, deteriorating daily lived experience, sustainable energy, a weak currency, and low market returns across asset classes.
A country’s ability to bounce back from an economic slump, its economic resilience, depends on a complex interplay of various factors.
While every economic downturn is unique and influenced by specific circumstances, there are several important factors that can contribute to a country’s ability to recover.
Fiscal and monetary policy
Government policies play a crucial role in economic recovery.
Expansionary fiscal policies, such as increased government spending or tax cuts, can stimulate demand and promote growth. Central banks can use monetary policy tools, like lowering interest rates or quantitative easing, to encourage lending and investment.
A recent note from National Treasury to national departments, public entities and provinces suggest that fiscal policy is tightening for the short to medium term.
South African Reserve Bank governor Lesetja Kganyago has been consistently firm in stating that the Monetary Policy Committee (MPC) expects interest rates to remain elevated until inflation is brought under control.
So there is limited scope for support of these policies.
Economic diversification
Economies that are less dependent on a single sector or industry are often more resilient.
Diversification helps mitigate the impact of a downturn in a particular sector. Countries with a broad economic base tend to recover more quickly. Unfortunately, South Africa’s mining sector has been shrinking for several decades.
China, labour, Eskom and deteriorating municipalities have all contributed to local manufacturing being a shadow of its former self.
Manufacturing has declined from 24,8 percent of GDP in 1981 to 12 percent in 2021. The financial sector has grown but it relies on growth from the rest of the economy to sustain any kind of long term growth.
Global economic conditions
External factors, including the state of the global economy, can significantly affect a country’s recovery prospects. Improved economic conditions in major trading partners can boost exports and help stimulate domestic production. The global economy continues to battle high inflation and rising interest rates. Global growth rates are expected to slow to 2,7 percent down from 2022’s 3,3 percent.
Expectations are for growth to slow down even further in 2024.
Financial sector stability
A well-regulated and stable financial system is essential for recovery. A banking crisis or a collapse of the financial sector can prolong economic slumps. Effective regulation and measures to restore confidence in the financial system are crucial.
South Africa’s financial sector is well regulated and has strong institutions which support the stability of the sector.
However, its greylisting by the Financial Action Task Force is expected to put increased pressure on the sector going forward.
It also reduces the confidence of foreign investors, as reflected by the lower ownership of South African financial assets by foreigners.
Labour market flexibility
Labour markets that can adapt quickly to changing conditions can facilitate recovery.
Flexibility in hiring and firing, as well as programmes to retrain and reskill workers, can help match job seekers with available opportunities.
South Africa’s labour markets are notoriously inflexible and it is expensive to lay off excess, unproductive or incompetent staff.
Another major challenge is the brain drain, which has seen talent opting to work elsewhere. South Africa’s education system has struggled to produce a pipeline of talent with the requisite literacy and numerical skills.
Most professional bodies have seen a massive decline in pass rates when it comes to professional certification examinations over the past decade.
Infrastructure investment
Investment in infrastructure projects, such as transportation, energy, and communication networks, can create jobs and stimulate economic activity. It also lays the foundation for long-term growth.
South Africa seems to be going backward at an increasing rate of knots when it comes to infrastructure investment.
The presence of construction mafia has tempered the appetite from the private sector, while a broken Eskom and municipalities limit the options for even the most optimistic of investors.
Political stability
Political stability and policy predictability are important for recovery.
Frequent changes in government or uncertainty in policy can deter investment and hinder economic growth.
Unfortunately South African politics has become increasingly unstable.
Johannesburg has had five mayors since the municipal elections in 2021. Coalition politics is messy and has resulted in the important work of managing cities being increasingly overlooked.
Access to credit
Access to credit and the availability of financing options for businesses and individuals are critical. Banks and financial institutions need to be able and willing to lend, and credit markets must remain functional.
Private sector credit continues to grow, albeit at a slower rate.
Much of the growth in private sector credit has been for solar installation and other energy solutions. Rising interest rates have also had an impact on the demand for credit. Access to credit remains robust, although lenders have also been tightening their lending criteria.
Consumer and business confidence
Confidence in the economic outlook can influence spending and investment decisions. Government communication, stability, and a sense of optimism about the future can boost confidence.
The RMB/Bureau of Economic Research Business Confidence Index shows that confidence has been net negative for most of the past decade.
Innovation and technology
Countries that invest in research and development, embrace innovation, and adapt to new technologies tend to recover more quickly.
Technological advancements can drive productivity and open up new economic opportunities. Unesco data from 2016 shows that South Africa spends 0,8 percent of GDP on research and development (R&D). Countries like Korea and Israel are near the top end at around 4,3 percent of GDP.
The tax incentive for R&D (S11D of the Income Tax Act) has been under review for a few years and a sunset clause was expected to be introduced in September 2022. Fortunately, National Treasury indicated that the incentive would be continued for another 10 years.
However, the number of applications for tax relief in terms of the S11D has halved from 305 in 2012/2013 to 153 in 2016/2017.
The inability of the private sector to take a long term view on the future of the country will likely cap the number of applications for years to come.
Trade policies
Trade policies and international relations can impact a country’s ability to recover. Favourable trade agreements and open markets can enhance exports and economic growth.
South Africa is at risk of being kicked out of Agoa (African Growth and Opportunities Act) largely due to vague foreign policy.
The country’s export basket is largely dominated by commodities, and South Africa is dependent on trade with a handful of mature export markets.
The collapse of Transnet has reduced the amount of product we’re able to get out, and has made the cost of exporting significantly more expensive.
The policy framework may be well established but, practically, companies struggle to get their product to foreign markets timeously and in a cost efficient manner.
The Carnegie Endowment for International Peace lists three super factors that aid in building resilience in a country:
High levels of societal trust;
Low corruption levels; and
High-quality political leadership.
Intuitively, many would rate South Africa low on all three factors. Our problems are many, and they are structural.
Is there another miracle around the proverbial corner? Or do we continue in the vein of Jan Smuts’s age-old quote where he referred to South Africa as “that peculiar country where things are never as good as they should be, but never as bad as they could be . . .”? — Moneyweb
