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Pretoria - South Africa’s economic growth outlook remained dismal, as Finance Minister Malusi Gigaba’s budget on Wednesday gave few answers on how the country could ignite the growth needed.
“It is not in the public interest, nor is it in the interest of government to sugar-coat the state of our economy and the challenges we are facing,” Gigaba warned in his mini budget speech.
South Africa’s economic figures are painting a picture of an economy slowly grinding to a halt. The country’s projected gross domestic product (GDP) growth for 2017 has been adjusted downwards to 0.7%, Treasury stated in its Medium-term Budget Policy Statement.
The projected growth was forecast at 1.3% earlier this year when former finance minister Pravin Gordhan delivered the budget at the end of February.
Hoping for better growth
Treasury was still optimistic that GDP growth could pick up speed again.
Gigaba forecast growth in SA to reach 1.1% in 2018, and 1.5% in 2019. He expected growth to increase slowly reaching, 1.9% in 2020.
“This trend assumes that the status quo prevails,” he said. “Therefore, we have the power to change our course and the political, social and economic agency to chart a new path.”
The SA economy only grew by an annual average of 1.9% between 2010 and 2016, well below the target of 5.4 % the National Development Plan (NDP) had envisaged.
Gigaba said improving SA’s economic growth outlook over the period ahead remains the biggest challenge.
National Development Plan
While government admits that restoring SA’s growth potential will require additional policy measures, critics have questioned whether the finance minister’s current actions will indeed boost growth.
Yet, Treasury believed that the “rapid implementation” of a range of micro-economic reforms, as outlined in the NDP, would boost confidence and provide support to the economy.
Treasury said per capita GDP has now declined for two consecutive years, severely constraining efforts to transform the economy and threatening the sustainability of public finances.
Global economy
Government still hoped that the SA economy could piggyback on the global economy, whose outlook is improving, with growth of 3.7% forecast in 2018. The global environment may be helpful as growth is improving despite persisting risks, Gigaba said.
Treasury anticipated this higher global growth could benefit SA’s medium to long term growth prospects, but only if the country can boost investment and export competitiveness.
It acknowledged that concerns about policy and political uncertainty, along with weak domestic demand, weighed heavily on business and consumer confidence, deterring investment and job creation.
Treasury said decisive action is needed for a new growth trajectory in SA.
Last year’s MTBPS warned that further deterioration of the economy could see SA entering a low-growth trap.
In such a scenario, weak GDP growth produces less tax revenue, it said.
Walking a tightrope
Treasury’s tightrope in balancing national debt and narrowing the budget deficit, while also creating jobs and attracting investors, is evident in the budget. It said aggressive fiscal consolidation to stabilise the growth of national debt and narrow the budget deficit might reduce perceived financial risks, but could also weaken demand, curbing investment and job creation.
“Yet taking no action could well result in credit rating downgrades, rapid exchange rate depreciation and capital flight,” Treasury warned.
The ray of light in SA’s economy is agriculture, where the real value added grew by 21.2% in the first half of 2017 compared to the same period in 2016, on the back of good rains in the summer rainfall region. Last year’s severe drought in the North caused agriculture to contract.
Manufacturing, a critical area for growth, however, continued its dismal performance, declining by 1.5%, while production contracted by 1.8% in the first half of 2017 compared to the same period last year.
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