While South Africa undoubtedly has its fair share of financial difficulties, there are a few bright spots in the economy, says Jeff Schultz, senior economist at BNP Paribas South Africa, with even a few surprises on the upside.
Schultz pointed to higher levels of nominal GDP growth, and higher revenues for Treasury in sight for South Africa – while the vaccine rollout numbers continue to head in the right direction to alleviate the pressure of the Covid-19 pandemic on the economy.
But these more optimistic points don’t come without caveats – with the economist pointing out that the government’s restraint on spending remains key.
“The bottom line is we believe higher levels of nominal growth and GDP inflation should prove an important boon for tax revenues over the medium-term,” he said.
“We see a scenario of up to five percentage points of GDP in nominal revenue improvement relative to the Treasury’s budget baselines. An earlier return to a primary surplus in the next three years now seems in reach to us,” he said.
“If there is no slippage from planned real expenditure cuts, the primary budget balance could return to surplus earlier than we previously expected.”
Other positive moves include:
- Upward revisions to South Africa’s GDP growth outlook;
- Higher state revenue dividends from stronger commodity prices;
- Nominal GDP bounced back above pre-pandemic levels in Q1;
- Both corporate income tax and VAT receipts returned to pre-Covid levels in three-month SAAR terms in April; and
- Local CPI inflation is not expected to spike meaningfully in the coming 18 months and to generally remain ‘well behaved’;
Level 4 lockdown
Analysts have pointed to the level 4 lockdown announced by president Cyril Ramaphosa on Sunday (27 June) as being a potential ‘fly in the ointment’ for South Africa’s economic prospects.
While planned as a 14-day intervention – which would only affect GDP growth ‘slightly’ – any extension risks putting industries like tourism, restaurants and breweries into deeper crisis.
Schultz said he shares these concerns, but noted that the restrictions stop short of being a wholesale shutdown of the economy, and thus the economic implications are not as severe as they were in the past.
“The aim of new restrictions is to strike a balance between keeping the economy open, but at the same time limit mobility and provide a window for struggling healthcare facilities to ramp up their high care and ICU facilities.
“These measures are to be expected given the inevitability of the third wave spikes and coming peaks,” he said.
The next 14 days will be critical, he said, as restrictions could be lengthened and strengthened should numbers continue to worsen considerably.
“We believe that should this scenario pan out – and further extensions to the level 4 lockdown continue beyond the initial 14 days – there could be some short term additional fiscal support measures put in place should the latter materialize; perhaps an extension of the social relief of distress grant for a month or two.
“Importantly we note that R16.2 billion has already been put aside in contingency for Covid related support for additional waves and ramped up vaccine rollout.
On the vaccine roll-out, Schultz said the daily numbers continue to move in the right direction, with last week seeing a new peak in daily rollouts (over 115,000).
He said the pace will likely pick up momentum now that the private sector is also involved and 2.6 million new doses arrived last week.
Aside from a potential extension of level 4 lockdown, the more optimistic points in the economy also face risks from other areas – specifically the government’s ability to contain spending.
For the more positive scenario to hold, it requires Treasury to stick to its real expenditure reduction promises outlined in February, Schultz said – specifically -3.5% real growth per annum in non-interest spending over the medium-term.
This promise faces pressure from several quarters – such as:
- The country has scheduled local government elections scheduled for 27 October amid many municipalities in financial dire straits;
- There are rising socioeconomic pressures (eg. calls for a basic income grant for the mass unemployed);
- Public-sector unions and the state remain far apart on wage demands for 2021 and beyond;
- Third and potentially fourth waves of Covid-19 prompting lengthier lockdown restrictions – all of which may make it more tempting to spend some of the additional revenue windfalls.
“Public-sector wage negotiations remain the biggest risk to this view, given the gap between the union demands of CPI + 4% and the state’s proposed freeze,” Schultz said.
“We expect the NT to hold the line for as long as it can on this matter, but there is a tail risk that evidence of an improved revenue performance could allow some complacency to slip into the negotiations.”
Despite the temptation to buckle or spend during the elections, Schultz said it is critical for Treasury to stick to its guns.
“We believe that the NT still cannot afford to be complacent on the medium-to-longer-term fiscal outlook. We think it necessary for the NT to use the cyclical global upswing in activity and commodity prices as an opportunity to ‘double down’ on its fiscal consolidation plans,” he said.