South Africa’s economic recovery may be scuppered as soon as it begins. A widening fiscal deficit, additional strain placed on state debt levels and price hikes in services such as electricity could see inflationary pressures increase and kill off economic growth before it begins in earnest, according to Dawie Roodt, chief economist at the Efficient Group.
The fiscal deficit — the difference between what government collects in revenue and what it spends — is expected to widen to between 5% and 8% of GDP, according to economists.
Roodt predicts that the fiscal deficit could widen by as much as R100-billion, or somewhere between 7% and 8% of GDP. State debt levels are likely to increase as a result, as government borrows money to fund its expenditure.
Roodt says that although the state can increase its debt levels, now at about 22%, and manage a fiscal deficit, this cannot be sustained in the long term. He said that ”below-the-line items”, such as bailing out ailing parastatals, will stress government finances further.
But these factors, combined with challenges faced by Eskom to power the economy once the recession has eased and increases in tariffs and other administered prices, may see inflation return.
Once this happens, says Roodt, the Reserve Bank might be forced to increase interest rates again, killing off economic growth before it has time to reassert itself.
He is critical of the Reserve Bank’s managing of the recent rates cycle. ”The [central] bank was too slow to take action on the up cycle,” he says.
It left interest rates too low for too long when the economy was doing well, he argues.
Rising debt levels and soaring consumer credit, which increased to 30%, indicated that there was trouble ahead. Household debt-to-disposable income levels jumped from 50% to 75% in three years.
But on Tuesday the Reserve Bank’s monetary policy committee left interest rates unchanged and kept the repo rate at 7%.
Reserve Bank governor Tito Mboweni said that ”overall the risks to the inflation outlook appear to be fairly evenly balanced”.
He said that steep increases in some administered prices, particularly electricity prices, and increases in nominal unit labour costs in excess of the inflation rate could become a problem, as could potential increases in the international oil price.
Consumer price inflation slowed to 6,4% in August, from 6,7% in July, mainly because of falls in transport costs linked to the fall in the petrol price. But food and non-alcoholic beverages, widely seen as one of the reasons inflation has remained ”sticky”, recorded a small increase of 0,1% from July to August. Administered prices, or those set by government or a producer’s group, rose by 0,2% year on year.
These prices include refuse removal, water, electricity, paraffin, petrol, public transport, telephone fees, postage, cellphone calls, Âtelevision licences and education fees. Economists have also flagged above-average wage increases as likely to stoke inflation.
The strength of the rand is working to counteract immediate inflationary effects. However, economic research from Nedbank suggests that this depends on whether the effect of the rand outweighs the impact of rising services and administered price inflation.
Roodt says that although inflation may make it to within the Reserve Bank’s target range of between 3% and 6% in the next few months, it is unlikely to stay there.
But in the short term there are some positive factors that could see the local economy sustain some sort of recovery, particularly in early 2010, according to Kevin Lings, an economist at Stanlib.
These include infrastructure developments ahead of the World Cup, the event itself, current low interest rates, which will affect company performance and consumer activity in the first quarter of 2010, and a number of infrastructure projects set to continue after the World Cup, such as Eskom’s expansion and the Coega industrial development zone.
But sustained growth and recovery into the years following the World Cup will depend on job creation, greater confidence, spending and expansion in the private sector, as well as the removal of long-term ”bottlenecks”, including skills and education challenges, says Lings.
”It is key that investment spend changes from public sector spend towards private sector growth and investment,” he says. ”The public sector can’t spend its way into growth. Neither can we do this through credit extension or increased borrowings. We need employment growth in the private sector.”
This will depend on a host of things, he says, including long-term infrastructure programmes such as Eskom’s expansion, the ability to keep interest rates, and thus the cost of Âcapital, relatively low, broader support of the private sector by government, and improved skills and education. He says a sustainable growth rate for South Africa is somewhere between 3,5% and 4,5%.
To try to outpace it at rates of about 5%, as seen in the past, will increase the likelihood of bottlenecks adversely affecting the economy, as has been seen previously.
Infrastructure might not be able to cope with growth, for instance, or skills shortages might become a cost for companies as they are forced to pay more for necessary talent.
The rate of recovery will depend on the recovery of South Africa’s trade partners, according to Tendani Mantshimuli, a consumer economist at Liberty Life.
”There will have to be a sustained recovery in economies that South Africa trades with to benefit our manufactured exports” if the country is to be part of the global economic recovery, she says. But the domestic recovery will be ”slow and protracted”, she says.
