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Johannesburg – The South African economy is essentially a boxer sparring with one hand, according to Size Nxedlana, chief economist at FNB.
Speaking at the FNB Franchise Summit held at Montecasino on Thursday, he explained that although Treasury has managed to curb government spending, there is one hand “tied behind our backs“ and that is the ability to boost revenue streams.
“Revenue can be compensated with higher volumes to deal with declining prices,” said Nxedlana. With stable global growth and rising rand competitiveness, South Africa needs more fixed investment in productive capabilities to generate more exports.
Treasury has undertaken tighter fiscal policy to reduce expenditure. “Government has to heed its own income statement if the country’s income statement is to heal,” he said. Treasury introduced expenditure ceilings not to grow spending more than inflation. “They have not only met targets, they have exceeded them.”
The “healing” of the country’s income statement and balance sheet comes at the expense of economic growth. To boost revenues, taxes were raised. If government had adjusted tax bands to compensate for inflation, this would have released R13bn in the economy, explained Nxedlana.
Economic prospects
“I do think that the longer-term prospects of South Africa are positive. But in the short term I think we are going to undergo a volatile, messy period,” said Nxedlana.
He explained that this is not because the economy is not adjusting appropriately to shocks, but rather because “current leadership” that South Africa has been “blessed” with, is not “governing optimally”.
The South African economy is hurt by shocks from slower Chinese economic growth and the associated decline in commodity prices, as well as the volatility of capital flows to emerging markets and the impact of last year's drought.
Read: Household credit cycle one of the weakest in history
As a result consumers have to deal with the pressures of increased unemployment and a 200 basis-point interest rate hike since January 2014. Credit extension to households has also been weak. Momentum Investments reported that at 6.8%, this was below market expectations of 7%. Household debt relative to income is however down 10 base percentage points since 2008.
SOE controversies highlight need for good governance
Nxedlana commented on Futuregrowth Asset Management's announcement that it will be withdrawing funding from state-owned enterprises (SOE), including Eskom. He explained this is a matter of not putting pension funds where there is a lack of understanding around governance.
Also read: Why Futuregrowth won't grant loans to SOEs
Leadership in government must improve if there is to be change in South Africa’s economic prospects, said Nxedlana. This may not happen in the short term. The response by citizens in local government elections is a signal that if governance does not contribute to economic development and job creation, a majority can reduce from over 70% to close to 50%.
“Government must act rationally and change. If they do not change, the day of reckoning will be brought forward,” he said.
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