President Cyril Ramaphosa says his economic stimulus package should fend off a full recession. (Delwyn Verasamy/M&G)
The government has not been sitting on its hands since the announcement on Tuesday that the country is in a technical recession, the treasury’s director general Dondo Mogajane said.
It was working hard to complete the finer details of an economic stimulus package, he said. “On Tuesday, there is an economic cluster meeting and I know the agenda will obviously include finalising the final elements of the support package.”
The optimism that greeted President Cyril Ramaphosa’s “thuma mina” call has faded as the economy has shrunk — by 0.7% in the second quarter, following a fall of 2.6% in the first quarter — putting South Africa into a technical recession for the first time in nine years.
Credit ratings agency Moody’s, which currently has South Africa’s rand-denominated credit rated one notch above junk, said the weaker-than-expected growth number was “credit negative”, adding to the fiscal and monetary challenges posed by the rand’s 20% depreciation against the dollar this year.
Moody’s cut the country’s economic growth estimate for the year from 1.5% to between 0.7% and 1%.
Ramaphosa, Finance Minister Nhlanhla Nene and other government officials have been in Beijing at the Forum on China-Africa Co-operation this week. The president told journalists on the sidelines of the meeting that he did not believe there would be a full-blown recession and that the stimulus would lift the mood and investment prospects of the country.
The package was first proposed by the ruling party at the end of July after Statistics South Africa announced that the unemployment rate had risen from 26.7% to 27.2%.
Mogajane said the government did not want to jump the gun because of the recession announcement and risk making promises that were not workable. “In the past government used to just announce. And we announced things that are not practical in some cases,” he said.
But Iraj Abedian, the chief executive of Pan-African Investment & Research Services, said the government had developed a culture of talking, meeting and making promises with little to no action. Things could only improve “depending on how the Cabinet acts, not talks”.
“President Ramaphosa has been moving way too slowly. Time matters and, unless the president moves to clear up policy uncertainties and put an end to inconsistencies, confidence in him will dilute slowly but surely,” he said.
Lumkile Mondi, an economics lecturer at the University of Witwatersrand, said the uncertainty over land reform and the mining charter, corruption and little confidence in the economy had discouraged investors. But the biggest driver of the recession was “the lack of domestic demand from highly indebted consumers as well as the high levels of unemployment”.
StatsSA reported on Tuesday that household consumption, which contributes about two-thirds to economic growth, shrank by 1.3%.
Abedian said: “The reality is that, unless and until policy uncertainties are removed, and investments are revived on a continuous and sustainable basis, the conditions will get only worse.”
Much of the current economic and fiscal stress was an aftermath of the “massive” looting that took place at state-owned entities, Abedian said.
Alexander Forbes’s chief economist, Isaah Mhlanga, agrees, adding that “South Africans are already feeling the effect. The unemployment rate increased, VAT [value-added tax] has risen to 15% and the price of petrol has been increasing for some time now.”
Mondi said black South Africans would be hit hardest. “Things are bad for black South Africans because a number of them, especially the youth, will never see a job [and] the education and health systems are all collapsing. It is hurting the very people that rely on government to look after them.”
Abedian said the fix would not be simple.
“Government needs to do a series of concurrent and highly complex things. The basket of what needs to be done [ranges from] a blend of decisive political measures to deep institutional restructuring to a thorough elimination of policy uncertainties,” he said.
Mhlanga said a clear policy framework, an investment in critical skills, the provision of incentives to specific sectors to attract investments and a cleaning up state-owned entities to make them profitable were needed.
Tebogo Tshwane and Thulebona Mhlanga are Adamela Trust business reporters at the Mail & Guardian