South Africa’s future could be better, could be worse: 2 scenarios

Absa has revised its forecast for GDP contraction in South Africa in 2020, to 8.3% from 9.7% previously, reflecting the better than expected data from the first, and second quarter.

But the financial services firm warned that the economic recovery in H2 2020 is likely to be slower than previously expected amid extended lockdown measures, and more localised disruptions to activity from ongoing Covid-19 outbreaks.

It also cited “a large negative demand shock from job losses, and the expiration of some of the government’s economic relief initiatives” for its “partial recovery of 2.4%” in 2021.

South Africa’s already strained public finances will remain under immense pressure, the macro economic research team at Absa said in a research document entitled ‘Q3 2020 Quarterly Perspectives’.

In the Supplementary Budget presented in June, the National Treasury projected a main budget deficit of 14.6% of GDP (equivalent to a primary deficit of 9.7% of GDP) for FY2020/21. “We believe the outcome is likely to be worse and project a main budget deficit of 16.6% of GDP,” said Absa.

Finance minister Mboweni has signalled a plan to achieve a primary balance in FY2023/24, which will require expenditure cuts worth R230 billion in the next two fiscal years, over and above the planned R160 billion wage bill cuts.

“We are doubtful that cuts of this magnitude can be achieved,” Absa said.

It said that given the inherent uncertainty and the magnitude of the policy challenges created by the crisis, other outcomes for the economy, relative to its baseline forecast, are possible, either for better or for worse.

“If the pandemic comes under control sooner than we expect, the recovery in 2021 may be stronger.”

Moreover, with reforms to lower the cost of doing business and lift confidence, we believe that the medium-term growth potential can be lifted to about 2.5%, Absa said.

“However, there is an alternative scenario in which the pandemic, along with its costs, drag South Africa’s macroeconomic performance down to a much weaker level,” it said.

For better or for worse

Absa discusses two possible alternative scenarios to its baseline, under the title ‘better or worse’.

For better to be South Africa’s future, Absa said it needs to see some reasonably robust combination of the following things happen:

For Better
  • Peak infections happen soon and taper off quickly, while an effective vaccine or treatment is widely available sooner rather than later.
  • Global GDP, thanks to all the advanced economy fiscal and monetary stimulus, bounces back more sharply than the IMF currently expects (-4.9% in 2020 and +5.4% in 2021)
  • Lockdowns are quickly relaxed further, including border openings, and international tourism begins to recover, supporting South Africa’s catering and accommodation industry.
  • Finance Minister Mboweni is able to push through something close to all of his desired fiscal adjustment package.
  • Market-friendly changes to South Africa’s investment regulations are introduced quickly, such that institutional savings increasingly finance vital infrastructure development across a range of sectors.
  • The state auctions broadband spectrum this year, agrees to a functioning Mining Charter 3 with the industry, makes good headway rather than lip service on reforms at ports and rail, and opens up the regime for skilled immigration.
  • Businesses and consumers quickly adapt to the dislocations of the new Covid-19 reality, such that activity levels recover quickly in Q3 and are sustained in Q4 and into 2021 as more of the economy comes back on line.
  • Recent outbreaks of social unrest abate as the recovery offers more economic opportunities and incomes, and workers who have been furloughed or retrenched quickly find new jobs.
  • Recent outbreaks of social unrest abate as the recovery offers more economic opportunities and incomes, and workers who have been furloughed or retrenched quickly find new jobs.
  • Commodity export prices stay high, but oil prices ease again.
  • Load shedding is not a major problem, as Eskom rehabilitates its existing plants, and new power supply is quickly procured.
  • The state takes a serious look at how it can improve its efficacy, and private and public sector corruption is brought to book.
  • The Covid-19 crisis motivates all societal and political and economic stakeholders to negotiate sincerely compromises on long-standing polarised positions; workable social compacts are struck in a number of contested sectors.

“If a strong majority of these things were to happen, we believe South Africa could reasonably expect a much stronger GDP bounce in 2021 than our forecast of just +2.4% and medium term growth rates to rise back to around 2.5% or so.”

However, South Africa’s future could also be worse, if some collection of the following developments were to materialise in force:

For Worse
  • Exposure to Covid-19 does not give long-lasting immunity and an effective vaccine proves elusive or wildly expensive.
  • The Covid-19 pandemic does not quickly peak and wane, but instead extends well into 2021, with fitful bursts of businesses opening and closing, and possibly even the escalation of lockdown levels again.
  • Finance Minister Mboweni is unable to secure strong backing from the Cabinet and the ANC for necessary spending cuts, particularly with respect to public sector wages, and adverse debt dynamics intensify.
  • Firm bankruptcies and worker layoffs are very large, generating extensive downside multiplier effects.
  • The escalating Covid-19 pandemic and its economic fallout cause social pressures to intensify markedly, especially after the government removes its temporary income support via the extended TERS/UIF scheme and the expanded social grants.
  • Oil prices rise further, but recent gold and PGM strength fades.
  • The government is slow to develop a workable framework for its goal of a privately financed infrastructure drive, especially if empowerment objectives prove hard to marry with the need for speed and efficacy.
  • Eskom’s unbundling process falters, while efforts to procure new power supply and rehabilitate the existing plants are unable to prevent recurring load shedding.
  • Heightened demand for reduced state resources serves to embitter and entrench ideological contestation within the polity, and functional social compacts are mostly impossible to secure.
  • The structural reform agenda remains more ‘talk’ than ‘walk’.
  • Emigration accelerates, depriving South Africa of human and financial capital, and capital flight generally picks up.

“Obviously, even some of these risk scenarios could drive South Africa to a rather dark place economically, under which GDP growth would further stagnate. The SARB would likely keep rates lower for longer, but at some point, the rand would likely weaken a lot and the SARB would then have to hike rates sharply.

“The building debt crisis would come to a boil, possibly leading the government to try to introduce asset prescription in an effort to avoid a full-fledged IMF programme with strict conditionality, for which there is no political support,” Absa said.

Read: Why Absa is bullish on the rand – and where it sees the currency by year-end

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South Africa’s future could be better, could be worse: 2 scenarios