Booming commodity prices have given South Africa’s economy a boost, setting it on the path towards post-pandemic recovery and giving it the room to withstand the fiscal squeeze of an almost R40-billion relief package.
But analysts warn that commodity prices, which have over the years sometimes papered over South Africa’s economic woes, will not keep the country going forever — and difficult decisions about how to balance the country’s fiscal constraints with the needs of its citizens will still have to be made.
Last week, Finance Minister Tito Mboweni revealed that South Africans would get some relief, in the form of a renewed R350 grant and support to small businesses, because of better-than-expected revenue collection.
Confirmation came last Friday, when the national treasury’s monthly government revenue and expenditure data showed that tax revenue amounted to R377-billion for the period from April to June 2021, an increase of 56.2% from the previous figure.
Strong tax collection, South African Revenue Service (Sars) commissioner Edward Kieswetter said last week, was partly the result of higher earnings by a mining industry that is riding the wave of the current commodities cycle.
Worryingly, however, the current tax revenue windfall has nothing to do with an improvement in the domestic economy, Hugo Pienaar, the chief economist at the Bureau for Economic Research (BER) at Stellenbosch University said.
“These are global factors that are driving up commodity prices and we are sort of being taken along for the ride … From time to time we almost get bailed out because we are a commodity producer,” Pienaar said.
“If it was not for these commodity windfalls, then if we did extend the social relief grant, then the budget deficit would have been even worse than was projected in February. Now, even with the additional expenditure, the budget deficit may actually look better. And again, it is not because of anything we did.”
Blow by blow
Mboweni gave the details of the R38.9-billion relief package after the country’s economy was dealt a double blow in July: President Cyril Ramaphosa announced another tightening in lockdown restrictions to curb the spread of the doubly infectious Covid-19 Delta variant driving the pandemic’s third wave. Restaurants and liquor outlets were forced to close their doors well into the month.
In the middle of July, businesses were left reeling after a week of riots and looting hit parts of KwaZulu-Natal and Gauteng. The violence, ignited by protests over former president Jacob Zuma’s incarceration for contempt of court, is estimated to have cost the country’s economy about R50-billion.
In a statement detailing the relief package, Mboweni noted that in both the short and long term, social unrest would dampen business confidence, reducing private investment and future GDP growth.
The week before, the South African Reserve Bank’s monetary policy committee said the riots “fully negated” prospects for better-than-expected GDP growth in 2021.
The year’s touted GDP growth has been driven by “generally favourable global conditions and strong commodity export prices” which have kept the rand buoyant despite ongoing economic uncertainty, the central bank committee said.
According to trade data released by Sars last Friday, the country’s trade surplus swelled to R57.68-billion in June — the highest on record. Exports in the month, lifted by higher commodity prices, amounted to R166.52-billion, a 43.6% increase over the same period a year ago.
The tax agency’s statistics show that South Africa’s best performing exports were precious metals, chemical and mineral products and base metals.
Tick, tick, boom
Commodities as a whole have risen more than 20% this year as a result of global economic recovery. S&P Global’s commodity index, which serves as a measure of the market’s performance over time, has risen 33.47% since the beginning of 2021.
According to Bloomberg Economics, South Africa is number 10 on the list of countries that have gained the most from the commodities boom in terms of the country’s net exports in proportion to its GDP.
Last week, Anglo American Platinum reported record half-year profits, with earnings before interest, taxes, depreciation and amortisation up almost 400% to R63.3-billion. The mining company contributed R16.6-billion — up from R1.3-billion in the same period last year — to the fiscus through taxes and royalties.
But commodity prices are very cyclical, Investec chief economist Annabel Bishop warned. Though prices are currently in an upswing, she explained, commodities have just come out of a Covid-induced downturn and the longer-term effects of the trade war under then-US president Donald Trump’s administration.
Commodity prices will likely remain elevated for the rest of this year, Bishop said, adding: “However, South Africa’s problems that inhibit growth are structural, including an insufficient electricity supply and onerous regulatory burdens with excessive red tape.”
“Political instability has also become a concern now as investors worry about further bouts of severe unrest.”
Future commodity booms may aid the fiscus, Bishop said, “however they cannot provide permanent fiscal relief”.
S&P Global sovereign ratings director Ravi Bhatia said strong revenue from the commodity boom had made the treasury’s decision on the relief package easier. “It gives them some fiscal space to play with.”
But, Bhatia said, the trend should be to continue consolidating government spending, noting: “Deficits are still very high and the debt levels are still very high.”
In February, the national treasury projected that the consolidated budget deficit would be 14% of GDP in the 2020-21 financial year, narrowing to 6.3% by 2023-24. It said debt had increased from 65.6% to 80.3% of GDP for 2020-21 and would stabilise at 88.9% by 2025-26.
Bhatia agreed that the country could pin its hopes on commodities to continue to provide fiscal relief. “As we come out of the Covid-19 crisis, commodity prices are doing well. But it is not certain that they are going to maintain their current strength. For the moment we are seeing the mining companies deliver very good revenues … But I don’t think we can take it as guaranteed to be permanent.”
A strong commodities performance also does not conceal South Africa’s structural woes, Bhatia noted. “The structural concerns are still very much there and they have to be addressed. You can’t rely on commodities to solve chronic structural issues — labour market issues, low growth, the lack of dynamism outside of the mining sector. They are all still there.”
The BER’s Pienaar said it would be very premature and dangerous to assume that the commodities boom would provide any permanent fiscal relief.
“I certainly don’t think the treasury assumes that … There is no doubt that it really is helping us in the current fiscal year. But I think one should be very careful to sort of assume that you can base large expenditure programmes on the expectation that this will continue,” he said.
Revenue from the commodities boom may have made the social relief package possible, but the national treasury still fought the president on the extension of the R350 grant into next year.
During last week’s briefing on the package, Mboweni revealed that the treasury had made clear the R350 grant could be extended for only six months. “We were wrestling about this matter with the president. And he — being a very good negotiator from his union days — made us cross over the line until the end of the financial year, which is March 2022,” the finance minister said.
Mboweni has faced similar pressure from sections of the governing ANC party pushing for the rolling-out of more permanent support in the form of a basic income grant, the Mail & Guardian reported last week.
Calls for such a grant are also supported by some economists, who say it could be financed through taxes and without dealing too big a blow to the fiscus.
Pienaar said the treasury should be confident that revenues outside of mining were strong enough to cushion the fiscus in the event of further stimulus. “You need to be fairly confident that that part of revenue will grow over the next five years and that overall GDP growth is going to pick up quite nicely,” he said.
“So they would have to be confident that the economy’s non-mining revenue raising capacity will improve substantially over time. If you are confident of that, then you can expand expenditure. But, once again, you can’t be confident about that.”
The treasury is in a very difficult position, Pienaar said, “because obviously there is a lot of need out there”.
“But there are always trade-offs in these policy decisions, especially if you are in a country like South Africa that has not been generating good growth for a number of years. So now, beyond this year, the decisions become very difficult.”