South Africa: Very Very Deep Trouble

The World Bank’s Global Economic Prospects report for June 2020 expects South Africa’s economy to contract by 7.1% this year, the biggest decline in a century.

This economic decline is a result of stringent measures to contain the spread of COVID-19, which included an extended national lockdown.

According to the World Bank growth is expected to rebound in 2021 which will be helped by the government’s fiscal stimulus package to soften the impact of the pandemic.

The recovery could gain further traction if structural reforms are implemented, like improved public investment management and greater private-sector participation in infrastructure development.

While there are some positives from the latest World Bank’s Global Economic Prospects report, Efficient Group economist Dawie Roodt is less optimistic.

Speaking to Business Day TV, Roodt said the only previous event which is close to what South Africa is currently experiencing is the Great Depression a hundred years ago.

Based on this previous event and other assumptions, Roodt expects the economy to contract by 10% this year which will result in 2 million job losses.

He highlighted that South Africa already has 10 million unemployed people, which is now set to climb to 12 million by the end of the year.

Roodt argued that South Africa is not doing enough to prevent this economic collapse but added that it is challenging for the government to do what is needed.

He said the Reserve Bank could cut interest rates further, but apart from that it could not do much more.

“We need fiscal policy. Unfortunately, in the case of South Africa we simply do not have the capacity,” said Roodt.

He said the government is talking about R500 billion in additional spending by the state, but that it is going to be significantly less in reality.

Roodt added that South Africa actually needs R2 trillion in spending to support the economy, but that the state does not have the fiscal capacity for that.

The reason for the lack of money, Roodt said, is because of financial mismanagement by the previous government.

South Africa in “very, very deep trouble”

Finance Minister Tito Mboweni is set to deliver an emergency budget speech on 24 June and has hinted at zero-based budgeting.

Mboweni said most sectors of the economy are in dire straits, the country is in recession and tax revenue has declined very sharply.

“We therefore need to refocus our attention to what is now feasible and how we can help our people during Covid-19 and still be able to support our economy going forward,” he said.

He added that that the country needs to be brave, adapt to changing circumstances and be determined to implement structural reforms.

“We are no longer as rich as we used to think we are. We have to adapt to a new situation, think seriously about going to zero-based budgeting,” said Mboweni.

Roodt argued that there is very little Mboweni can do to address the challenges the South African economy faces.

He said the Finance Minister will try to increase taxes, potentially through a wealth tax and increased personal income taxes, but that it will not have much of an effect.

He said what should be done is to cut the public wage bill and stop wasting money on state-owned enterprises.

“Unfortunately, those things are very politically loaded issues. We are in very, very deep trouble and are starting to pay the price for that,” said Roodt.

Expect more bad government and power-hungry bureaucrats

Roodt said his biggest concern is that because of the lockdown and emergency measures the politicians and bureaucrats have a lot of power today.

“Knowing politicians and bureaucrats, they are not going to give that power back,” said Roodt.

This means it is not going to be easier doing business in South Africa in future. Instead, the inverse will happen.

“We are going to have a bigger state trying to get more involved and do more things and keep on doing things badly like they have been doing over the last 10 years,” said Roodt.

“We are going to have more bad government in South Africa and more power-hungry bureaucrats on top of that.”

Officially Published by MyBroadband

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