SA should grow economy through inclusive growth

Finance Minister Pravin Gordhan says to get the country on a path of better growth, all sectors of the economy should work with government in a manner that promotes inclusive growth.

The Minister said this when he briefed the joint Standing Committees on Appropriations and Finance, on Thursday, following his Medium Term Budget Policy Statement in Parliament, on Wednesday.

“The singular focus needs to be on inclusive growth. How do you create conditions for growth in this economy? Whether it is confidence building, whether it is increases in investment by the state, whether it is encouraging private sector investment, or foreign investment,” the Minister said.

When he tabled his budget at the National Assembly, the Minister revised growth projections downwards to 0.5% for 2016, which was lower than the February estimate of 0.9%.

The Medium Term Budget Policy Statement cited low growth margins on global pressures, as well as low levels of investor confidence and structural constraints in the domestic economy.

In this difficult period, the Minister undertook a tough balancing act – first by reducing the expenditure ceiling by R10 billion next year and adding R13 billion in revenue measures.

A further proposal was made to reduce national departmental budgets by 1.1%, asking them to use existing resources to optimise delivery.

In addition, to the R16 billion added to higher education funding in the February budget, National Treasury proposed a further R9 billion to be added to the National Student Financial Aid Scheme (NSFAS) over a three year period and in the process, raising its funding by over 18% per year.

The Minister said these fiscal measures, as well as other reforms proposed in the medium term budget, were not enough.

“The fiscal issues need to be complimented by what we call a multi-faceted approach. Firstly, get the growth dynamic going.

“Secondly, build confidence, investment and partnerships. Government cannot do all the things that need to be done on its own. Thirdly, ensure that our government programmes like the nine-point plan are actually implemented. There must be concrete evidence of milestones and delivery and action assures government and others that we are a government at work.

“Fourthly, we need to undertake the reforms that we said we are going to undertake…”

National Treasury Director-General Lungisa Fuzile said with decisive action, South Africa will emerge from a period of economic weakness.

He said this would enable government to provide greater support to the economy and boost employment.

“Government’s economic reform programme is guided by the National Development Plan and, over the short term, the nine-point plan announced in February 2015.

These efforts aim to create a more just society and ensure that benefits of transformation are shared as broadly as possible,” he said.

He also said implementation reforms must be accompanied by efforts to tackle corruption.

“The benefits of empowerment should be accessible on an equal basis, not limited to connected insiders.”

SA can grow the economy better

Earlier in the day, the Minister said South Africa has come a long way to improve the lives of all South Africans.

Speaking at a breakfast briefing News24 FrontLine, which was organised by the media group, the Minister said the country has done well to get where it is today.

“If you take the past 22 years, take Stats SA numbers and SA Race Relations numbers, the numbers indicate that in terms of access and in terms of quality, we have done extremely well as South Africa.

“The number of middle class people would indicate that, your media group and what it serves and who it serves and what you see in the market, will show you shifts in the LSMs over the years as well.”

However, the Minister said more still needs to be done to put a dent on unemployment and alleviate poverty and inequality.

“What we pointed out in the speech, and it has been clear for quite a while now, is that we need a combination of efforts. We need macro stability, we need fiscal measures and monetary measures.

“Secondly, we need confidence and a clear unmitigated focus on growth and so everybody has to ask – what is my contribution to investing, to creating confidence, to creating jobs, to helping new enterprises develop?”

He said the SA economy was too concentrated and did not allow for enough competition, which he said needs to change.

---

Medium Term Budget Policy Statement 2016

Ch 2. Economic Outlook

Economic growth and transformation

To achieve the goal of economic transformation and build an equitable society, South Africa requires higher growth. Without decisive action, a protracted period of low growth will set back the country’s ability to realise the constitutional vision to “improve the quality of life of all citizens and free the potential of each person”. The National Development Plan (NDP) recognises that faster, broad-based growth is needed to transform the economy, create jobs, and reduce poverty and inequality.

While global economic weakness plays a large role in South Africa’s economic growth performance, domestic constraints stand in the way of investment, output and trade. The slow pace of finalising policy interventions in areas such as land reform, immigration, labour relations, mining and communications undermines confidence, which is a key determinant of economic activity. Government must demonstrate more rapid implementation to restore confidence and give hope to citizens.

South Africa’s strong institutions, stable macroeconomic environment, well-developed financial markets, relatively high levels of innovation capacity and strategic position in the region provide a solid platform for stronger growth. The fiscal framework and the monetary policy stance support a sustainable recovery in economic activity.

Government continues to prioritise infrastructure investment to ease bottlenecks and raise the economy’s potential growth rate. Public-sector infrastructure budgets total R987.4 billion over the next three years. Continued investment in energy, transport and telecommunications will boost internal and external trade efficiency. Efforts to expand coinvestment with the private sector, alongside a series of other NDP reforms discussed later in this chapter, will build confidence and encourage job creation.

Domestic outlook and developments

Domestic GDP growth for 2016, forecast at 0.9 per cent at the time of the 2016 Budget, has been revised down to 0.5 per cent. Growth is expected to increase to 2.2 per cent by 2019, supported by more reliable electricity supply, improved labour relations, low inflation, a recovery in business and consumer confidence, stabilising commodity prices and stronger global growth. Assumptions underpinning the forecast appear in the technical annexure.

Growth in real output remained moderate in the first six months of the year compared with the same period in 2015. Mining growth has declined and agricultural output weakened as a result of the drought. Growth in transport and telecommunications, and in electricity, gas and water, fell on weak demand. Manufacturing output strengthened following a contraction in 2015. Finance, real estate and business services remained buoyant.

Overview of major economic sectors and employment

Real value added in the agriculture, forestry and fishing sector contracted by 8.3 per cent in the first half of 2016 compared with the same period in 2015. Two successive seasons of severe drought in the summer rainfall regions resulted in six consecutive quarters of falling output, following robust growth in 2014. As a result, South Africa will be a net importer of maize in 2016/17, with imports expected to exceed 2 million tons. Exports of certain fruit, nuts and beef products have remained resilient, supported by the weaker rand, global demand and market diversification. Output is expected to recover as weather conditions improve.

Mining production was down 8.3 per cent in the first half of 2016 compared with the same period in 2015. High operating costs, safety stoppages, low commodity prices and weak global demand made for a difficult operating environment. Over the medium term, improved demand and increased electricity supply should boost production. In addition, a moderate rise in commodity prices that began in 2016 is expected to continue.

Manufacturing has contributed 0.2 per cent to gross value added in the first half of 2016, with performance varying across subsectors. Petrochemicals, wood and paper, and food and beverages posted growth rates of 6.5, 5.3 and 0.9 per cent, respectively. In contrast, metals products and motor vehicles contracted by 3.6 per cent and 0.5 per cent respectively. Overall capacity utilisation improved in the first half of 2016.

A moderate recovery in household consumption growth from 2017 should support domestic demand in food and beverages, motor vehicles, furniture and appliances. Continued global demand is expected for motor vehicles, with exports of finished units set to grow by over 10 per cent this year and next.

The financial sector grew by 2.2 per cent during the first half of 2016 compared with the same period in 2015, despite low GDP growth and constrained household balance sheets. Domestic banks remain well capitalised, with a total capital adequacy ratio of 15.2 per cent in June 2016, up from 14.2 per cent in December 2015. “Tier 1” capital adequacy – the highest quality capital reserves – stood at 12.4 per cent in June 2016, well in excess of Basel III’s 6 per cent requirement.

Net exports and the current account

Exports grew by 3 per cent in the second quarter of 2016 compared with the same period in 2015, supported by manufacturing and mining exports, particularly platinum group metals. The first half of the year saw a two percentage-point decline in the share of exports to African markets compared with the same period in 2015, reflecting weaker economic conditions in the region.

In recent years, despite the large and sustained depreciation in the value of the rand, South Africa has not experienced strong export growth. Since 2010, the real effective exchange rate has depreciated by 20.9 per cent. Yet the main factor in export growth is global demand, which has been moderate. A one-percentage-point increase in global demand could add as much as 0.3 percentage points to medium-term growth.

Soft domestic demand was reflected in the decreased volume of imports, which fell by 3.1 per cent in the first half of the year compared with the same period in 2015. Notable exceptions included vegetable products, oils and fats, where increases of between 43 and 60 per cent reflected the effects of the drought. Over the medium term, improved domestic demand should support import growth, but the weaker currency will limit the expansion of volumes. Imports are expected to contract in the current year and grow by 2.7 per cent in 2017.

The current account deficit narrowed in the second quarter as net exports increased and the trade account recorded a surplus, despite some weakening of the terms of trade. The deficit was funded through an increase in net portfolio investment, mainly into government bonds, and a rise in net foreign direct investment. Over the next three years, the current account deficit is expected to average 3.9 per cent, down from an average of 5.2 per cent between 2013 and 2015. The forecast does not project any major gains in the terms of trade.

Reforms advancing economic transformation

South Africa’s potential growth rate – the fastest the economy can sustain without increasing inflation – has fallen from about 4 per cent to below 2 per cent since 2012. The main obstacles to economic activity are found within the domestic economy. They include infrastructure bottlenecks, low levels of competition in certain markets, a volatile labour relations environment, regulatory constraints and red tape, inefficiencies in stateowned enterprises, and uncertainties in the policy environment. By limiting the economy’s potential to grow more rapidly, these constraints effectively block economic transformation.

Government’s economic reform programme is guided by the NDP and, over the short term, the 9-point plan announced in February 2015. These efforts aim to create a more just society and ensure that the benefits of transformation are shared as broadly as possible. The success of these efforts in boosting economic growth and employment depends on how well interventions are coordinated and put into action.

A key policy focus over the medium term is to promote urban planning reforms, supported by public and private investment, to encourage more rapid growth and innovation in South Africa’s large cities.

Encouraging private-sector investment

Expanded investment by the private sector will improve productive capacity and grow the economy. Tackling corruption will discourage rentseeking, lower transaction costs, reduce uncertainty, and prevent the wastage of both public and private resources. Initiatives that are under way include the following:

• Easing the regulatory burden and making it easier to invest. InvestSA has set up a one-stop shop to help investors with the procedures required to start up and run a business.

• Reducing time spent on compliance and paperwork. As a result of increased automation at the Companies and Intellectual Property Commission, it now takes less than a day to register a firm. Title deeds are now available within seven days at the Deeds Office. And the Department of Justice has streamlined contract enforcement, introducing court mediation to reduce legal costs.

• Strengthening competition law. Sections of the Competition Amendment Act that came into effect earlier this year make it a criminal offence for directors or managers of a firm to collude with their competitors to fix prices or collude in tenders. This should reduce prices and increase market access.

• Enhancing the environment for small business. The Department of Small Business Development is updating legislation to improve support for small businesses. Government has targeted support to small firms, and is encouraging large businesses to contract more work from small companies.

Government’s approach has begun to yield greater private investment in several areas – notably in the successful IPP programme. In addition, automotive assembly firms have pledged investments of R15.4 billion, which would create an estimated 4 675 jobs. In June 2016, the Centre for High Performance Computing launched the first petascale computing system on the African continent. Construction of the 64-dish Meerkat radio telescope array in the Karoo is due to be completed by the end of 2017. And public and private investment totalling R17 billion has been targeted towards “oceans economy” initiatives over the past two years, creating about 5 000 jobs. Investments support shipbuilding and training of marine engineers and artisans.

Complementary efforts support both commercial agriculture and emerging farmers. Efforts to diversify markets, for example, have boosted apple exports to China by 77 per cent. The recently signed Southern African Development Community – EU trade agreement improves access to European markets for sugar, ethanol and wine.

Despite a significant reduction in borrowing costs over the last 20 years, availability of funding remains an obstacle to business development. Government remains committed to working with the financial sector and development financial institutions to reduce funding constraints to business expansion and job creation.