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A volatile currency that remains weak historically; GDP growth of less than 1%; a notoriously high unemployment rate; widening inequality and the industrial failings of a commodity-driven growth model. Not a pretty picture of an economy. Yet this is what South Africa is faced with.
Speaking at the release of the World Bank’s ninth South African Economic Update on 17 January in Johannesburg, World Bank senior economist Marek Hanusch said that SA’s GDP per capita growth has been negative for the last three years, which translates into less income for the poor and less resources for government to meet its development objectives.
The National Development Plan (NDP) set out to create 600 000 new jobs every year, to bring down the unemployment rate to 6% in 2030. Needless to say, we have been falling significantly short.
The update reveals that in the third quarter of 2016, the unemployment rate edged up by 1.6 percentage points compared with the same period in 2015, touching 27.1%, the highest recorded level in 13 years.
Further, foreign direct investment (FDI), which is extremely important in helping to grow our economy, has been in decline for the last five quarters. “Net FDI, at least for the first half of 2016, was negative,” said Hanusch.
Despite the fact that we are very far from achieving NDP goals, Hanusch believes the vision of the NDP for 2030 is good and is concerned with the right issues, namely significant reductions in poverty and inequality. “The implementation has been slow and the growth scenarios might be off,” concedes Hanusch, “but let’s see what it does.”
And one way to help achieve the NDP goals (perhaps not in their ambitious entirety) is focusing on private investment for job creation.
Effective industrial policy
An investment tax incentive (ITI) allows a firm to deduct part of its tax liability for a certain part of their investment, and varies across sectors.
Of course, ITIs are not the only thing that can be done to improve investment, but private investment for job creation was the focus of this update.
Hanusch explained that reorienting ITIs to specific sectors in SA would increase their cost effectiveness and cost efficiency, while boosting job creation and encouraging private investment.
According to the update, reorienting these incentives will create jobs at no additional fiscal cost, which is an extremely import factor to consider as rating agencies are watching SA very closely. (Also see sidebar.)
Sectors that have been found to respond well to ITIs include agriculture, manufacturing, construction, trade and other services. In the case of agriculture, for example, every 10 new jobs that are created lift 13 people out of poverty, according to Hanusch.
Further, “large employment multipliers [the creation of indirect jobs] in the manufacturing sectors strongly amplify the impact of tax incentives on job creation”, the report states.
In terms of getting political buy-in to these report findings? Hanusch points out that the political economy is unknown in this regard, but the information is in the public domain and hopefully will trigger debate.
The downgrade factor
If we’d been downgraded at the end of last year, short-term borrowing costs would have gone up by 60 basis points, 1% would have been shaved off our GDP, South African’s would each have been R1 000 worse off and 160 000 South Africans would have been pushed into poverty.
These are the estimates World Bank senior economist Marek Hanusch shared at the release of the ninth South African Economic Update.
We staved of a downgrade in 2016, but the risk of one this year still looms. Ultimately, it’s about the solvency of a government and in order to improve this, we either need to increase revenue or cut expenditure, said Hanusch.
Although Treasury has done a stellar job in working on fiscal tightening, there is only so much it can do in terms of revenue, he explained. To avoid a downgrade, South Africa desperately needs growth.
Should the downgrade hit us this year, of which Hanusch isn’t sure, he expects the impact to be roughly the same as the prediction for a 2016 downgrade.
Current growth outlook
The ninth South African Economic Update estimates growth in 2016 to have been 0.4%, making it the third year of declining GDP growth. GDP is expected to accelerate to 1.1% and 1.8% in 2017 and 2018, respectively, according to the report.
