South Africa’s economy is not growing at a speed experienced by other major emerging markets. The growth levels for 2020 projected by major financial institutions are disheartening. The World Bank has cut the country’s growth forecast. Moody’s also cut growth forecast this month to 0.7% - citing a stalling economy and widespread power outages.
In the midst of this dismal growth under Cyril Ramaphosa’s presidency – unemployment remains at alarming levels. And at this point, sadly, government’s actions indicate that this staggering unemployment will be with us for a long while.
All the economic fundamentals are bad in South Africa. Consumer and business confidence are at their worst levels in years. Consumers are not buying goods and services at a scale that bolsters growth. This is damaging in an economy that, amongst many things, needs stronger consumer spending and confidence in order to grow speedily.
Higher and sustained business confidence is a very crucial element of a healthy economy. For businesses to expand and create more jobs – improved confidence is a necessity.
One of the very important economic indicators is the Purchasing Manager’s Index (PMI). Economists use PMI to gauge the levels of productivity in manufacturing and service sectors. PMI tends to respond to consumer demand – and is a good indicator of the country’s economic health. This is one of the most watched statistic indicators by both local and international investors. A reading of above 50 of the PMI indicates an improvement in manufacturing and services; and a reading of below 50 indicates a deterioration.
According to Absa, South Africa’s PMI has slipped deeper into contraction. This shows weak consumer demand weighing on the already ailing economy. The contraction causes great harm to our efforts to bolster growth and job creation in manufacturing.
The budget deficit rose last year. Some economists project that it will rise again this year to, possibly, more than 6%. We are spending beyond our means. Ramaphosa’s government continues to borrow in order to meet South Africa’s financial needs. The borrowed money is used to finance, amongst many things, huge government programs which include bailing out dire state-owned entities. The continuing rise of our budget deficit is really another bad news for the country.
What Mboweni needs to do in his budget speech
Firstly, it’s vital to highlight that Mboweni has been courageous to publicly express his ideas on how we can reverse the dire economic situation and save the economy that is in tatters.
With his upcoming budget speech, he has an opportunity to demonstrate that his words can be put into action. His call for the liberalization of the economy over the past months needs to reflect in his budget speech. This will prove difficult because of the limited financial resources.
Limited financial resources should not be an excuse not to take first steps to a pro-market and pro-growth course. All he needs to do is bring back a positive atmosphere into the economy. The business community, investors and sovereign credit ratings agencies will be watching closely to see if Mboweni sets us on the pro-growth direction.
Currently, we cannot afford raising taxes in any form. I’ll be very frustrated if Mboweni raises taxes. Such a policy will be harmful in an already depressed economy that is underperforming other major emerging markets. What needs to be cut to fix our fiscal situation is government spending. If politicians are genuine about fixing this country, then they must cut spending.
There are multiple ways to slash spending that has really got out of hand over the past twelve years. One, and perhaps the most effective way, is to leave much of what is related to provision of services to the private sector. Government needs to exit business urgently. Its involvement in business costs taxpayers billions of Rands every year. Of course, the fruits of such a step in policy will be experienced over a long term – but the crucial, symbolic steps must begin now.
Moodys’s will report on South Africa’s credit rating late next month. How Moody’s grades South Africa is highly dependent on Mboweni’s budget speech this week. At the moment, Moodys’ outlook on South Africa is negative. In order to not downgrade South Africa to junk status, all they are looking for is serious fiscal consolidation from Mboweni.
Over the past twelve years, South Africa has gotten itself into an economic position that has left the country with no choices but to make unpopular decisions. It’s not only politicians we have to blame for playing Russian roulette with our economy – we have to blame ourselves too for voting for the same toxic politicians time and time again.
Mboweni ought to do what needs to be done in his budget speech – not what is politically feasible. We can’t afford politics in our economy at this point.
Phumlani M. Majozi is an international affairs and politics analyst, senior fellow at AfricanLiberty.org, radio talk show host and non-executive at Free Market Foundation South Africa. Views expressed are his own. Follow him on Twitter: @PhumlaniMMajozi