Builder: President Cyril Ramaphosa at last year’s African Mining Indaba. He inherited a struggling economy afflicted by state capture and slow growth and began an investment drive. Photo: David Harrison
ANALYSIS
When Cyril Ramaphosa ascended to the presidency five years ago, a large part of his appeal was his perceived affability towards investors, which held the promise that his administration may be able to resuscitate South Africa’s breathless economy.
In his first State of the Nation address, the president vowed to set the economy on a new path of growth and employment. Doing so would entail encouraging investment by restoring confidence in the functioning of the state, a considerable task given the ravages of corruption over the preceding decade.
Since then, the country’s credit rating has fallen deeper into junk status, investors are only now starting to show signs of life and the economy is a mere 0.8% larger than it was after Ramaphosa’s first year — which has caused unemployment to climb higher than it was before his presidency.
Today, a protracted energy crisis threatens to wipe out whatever headway was made during the president’s first term.
Considering the bad hand Ramaphosa was dealt, some argue that five years may just not have been enough time for the president to turn around the economy and that he will need a more no-nonsense second term to see his ambitions through. The question is: how much longer can the country’s economy, and its people, possibly wait?
Ramaphosa inherited an economy that was already on its knees after enduring the blows dealt by the global financial crisis and the state capture years under then president Jacob Zuma.
Prior to his first term, South Africa’s economy had endured an extended period of sluggish growth. In the years prior to the global financial crisis, domestic GDP grew at an average rate of 4% a year. In the decade that followed, it expanded by only about 1.7% each year.
That decade was marked by diminishing levels of fixed investment. In 2007, real gross fixed capital formation grew by 14.8%. By the end of 2017, this had slowed to a mere 0.4%.
It is no wonder then that, in his first State of the Nation address, he was keen to underline the importance of encouraging investment to achieve growth. The “Thuma Mina” era ushered in Ramaphosa’s investment drive, which, according to its organisers, has attracted more than R1.14 trillion worth of commitments.
Despite the president’s push, investment has been slow to recover. Gross fixed capital formation contracted by 1.4% as a result of low business confidence, regulator uncertainty, electricity supply disruptions, subdued economic growth and concerns about fiscal sustainability. Similar conditions caused investment to contract again, although to a lesser extent, in 2019.
The year that followed marked the sharpest decline in gross fixed capital formation in at least two decades. The first year of the Covid-19 pandemic also marked the third consecutive contraction in investment under Ramaphosa’s presidency. In 2021, gross fixed capital formation finally increased, but only by 2%.
Lacklustre investment has translated into feeble growth. The pandemic, which caused 2.2 million people to lose their jobs in the second quarter of 2020, has undeniably made economic conditions worse — which to some extent contributed to the social unrest in July 2021, dealing yet another blow to growth.
Today, South Africa’s economy is slightly larger than it was before the pandemic. Last week, the South African Reserve Bank forecast that GDP grew 2.5% in 2022.
But South Africa’s growth rate lags most other emerging market economies, according to 2022 estimates contained in the International Monetary Fund’s recent World Economic Outlook Update, which suggests this trend will continue in 2023 and 2024.
So while South Africa’s economy has recovered at least to its already bleak pre-Covid levels, it has struggled to keep momentum — thanks in large part to an energy crisis which has knocked business confidence. Some economists have argued that inadequate public investment, the result of the government’s policy of fiscal consolidation, is at the heart of the country’s growth woes.
Last week, the Reserve Bank’s bleak evaluation of the country’s economic health put load-shedding at the centre.
According to the bank, the current scale of load-shedding stands to shave as much as two percentage points from growth in 2023. The bank revised down the country’s growth forecasts considerably, from 1.1% to a mere 0.3% in 2023 and from 1.4% to just 0.7% in 2024.
This forecast, the bank said, takes into account more modest investment growth than previously expected. Investment is still positive, the bank noted, but is revised down because of weaker confidence and lower expected growth.
The economic data covering Ramaphosa’s first term, as well as the Reserve Bank’s forecasts, underline just how difficult it has been for the current administration to claw back confidence. This is a consequence of the state capture period, analysts say. The pandemic, as well as last July’s unrest and the devastating floods last April, set the president’s ambitions even further back.
Sanisha Packirisamy, an economist at Momentum Investments, pointed out that since Ramaphosa assumed leadership of the country, the Bureau for Economic Research’s (BER) business confidence index has slipped to an average of 34 points. The index has averaged 44 points over the long term (with 50 representing neutral confidence and less than that representing unsatisfactory confidence), leading up to the Ramaphosa era.
One needs to consider the issues Ramaphosa inherited when he was elected as president of the country, Packirisamy said.
“These issues included endemic corruption, a threat to the independence of South Africa’s democratic institutions, hollowed out institutions from a skills and funding perspective, fiscal and debt mismanagement and an economy which had been downgraded into junk status,” she added.
“In our opinion, meaningful foreign and local investment is still lacking given a tarnished partnership between government, business and labour, lingering policy uncertainty and ongoing capacity constraints.”
The perceived deterioration in service delivery and indecision around key policies important for growth and job creation have further resulted in a fall in political trust and a deterioration in social cohesion, according to Packirisamy.
She noted there has been mixed progress on reforms.
For example, Ramaphosa’s administration lifted the licensing threshold for embedded electricity generation. Considered a major step towards reforming the energy sector, the amendment enabled private renewable developers and individuals to generate power up to 100 megawatts without a licence, enabling them to feed excess power into the national grid and selling electricity to multiple customers.
Last year, Ramaphosa announced the threshold would be removed entirely and suggested that the initial decision to lift the limit led to increased investment by the private sector in generation capacity.
But other areas of electricity reform have been slow, Packirisamy said, including the emergency procurement of power, establishing an approved feed-in tariff and obtaining financing to improve transmission capacity.
Hugo Pienaar, the BER’s chief economist, also suggested that evaluating the country’s economic progress over Ramaphosa’s first term is complicated, given the constraints on his reform agenda.
“On one hand, we have gone significantly backward on energy, but this is a president that is reform minded and that has put in place steps that should put us in a much better space over time. You can’t say that where we are today that we are necessarily in a better space,” Pienaar said.
There were significant shocks to the country’s economy during Ramaphosa’s first term, he added. “So you could say, ‘Look, this was under Ramaphosa’s watch.’ But it is not like he has been dealt a good hand.”
Pienaar noted that South Africa’s fiscal position has improved, thanks to the commodity windfall. “But again, there you can’t put it down to Ramaphosa because we got an external boost from the windfall. It does not necessarily have to do with us doing anything well.”
It is probably too early to make a fair assessment of the economic effect of a Ramaphosa presidency, Pienaar suggested.
“Perhaps we will only in future really be able to answer this question, if in the president’s second term he is more authoritative in pushing his agenda and getting the delivery of reforms done. So for now it is a very mixed scorecard.”
Ramaphosa has said that the effect of reform efforts to solve the country’s energy crisis will not be felt overnight. Business and labour have complained about the glacial implementation of plans to fix Eskom and to add capacity to the grid.
One economist, who asked not to be named, said there tends to be a substantial lead time before reforms find expression in the economic data. He said economic reforms can take a minimum of four years to be seen through properly and have an effect.
Duma Gqubule, an economist and a research associate at the Social Policy Initiative, was less forgiving of the slow pace of progress under Ramaphosa’s administration.
“We should start talking about the five wasted years in addition to the nine wasted years [during Zuma’s presidency]. And the impact of the five wasted years has actually been worse than the nine wasted years,” Gqubule said.
“We have never seen this level of power blackouts, which have completely shuttered the economy … The situation looks bleak going forward. This is a calamity.”
Gqubule also criticised Ramaphosa’s reform agenda, which was outlined in a 2019 treasury document titled Economic Transformation, Inclusive Growth, and Competitiveness.
According to the document, the identified reforms are likely to add an estimated 2.3 percentage points to baseline growth over the next 10 years, while creating more than one million jobs — which is not nearly sufficient to bring down unemployment, Gqubule said.
Last week, during the question and answer session following the Reserve Bank’s repo rate decision, deputy governor Rashad Cassim noted that, as a rule of thumb, the economy has to grow by 5% every year to start bringing down unemployment.
“When we sit at the current numbers, we see unemployment go up. When we are around two to three percent, we are barely able to keep the unemployment rate steady,” Cassim said.
Given the Reserve Bank’s bleak growth forecasts, the country could very well be on the brink of calamity.
If these forecasts are proven correct, Packirisamy noted, the economy will not be able to create enough jobs.
“This implies more social tension over time and a higher risk of social upheaval.”
The country is running out of time to avoid this potential outcome of the energy crisis, Gqubule said, predicting the ruling ANC would pay dearly at next year’s general elections as a result.
“We have no time to sort this out. Everything is collapsing … basically, the ANC is heading towards an electoral disaster.”
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