21 Sep 2018

Economic Stimulus and Recovery Plan announced

Annabel Bishop

Chief Economist

The ERSP focuses on inclusive economic growth, is budget neutral and has drawn some positive market reaction.

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South Africa’s Economic Stimulus and Recovery Plan (ESRP) was announced today by the President, and consists of a range of measures, both financial and non-financial, in order to ignite economic activity, restore investor confidence, create new jobs and restore lost jobs, aid the vulnerable and embark on a number of interventions into municipalities. Priority will be given to those which have the greatest impact on women, small businesses and the youth.

 

Specifically, this means the reprioritization of public spending within the current budget (not a higher level of expenditure then budgeted) to create jobs, the implementation of growth-enhancing reforms, to establish an infrastructure fund, address health and education and invest in municipal social infrastructure improvement. Additionally, township industrial parks are planned. To promote job-creating economic growth the level of investment needs to increase substantially. Accelerating key economic reforms to unlock growth in the economy includes changes to SA’s visa regime, to promote tourism and the travel of highly skilled individuals and restoring investment and exploration levels via the revised mining charter, while the minerals and resources petroleum bill is to be scrapped, with new legislation planned.

 

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Reprioritised budget spend

In order to reduce the cost of doing business and assist export competitiveness, government will review the administrative prices of ports, rail and electricity tariffs, with high demand radio spectrum licensing beginning in the next few weeks all aimed at lowering data costs. Furthermore, there will be a crackdown on illegal imports, expanding procurement from small businesses and cooperatives, and increased use of trade measures.

 

Reprioritised budget spend within the current fiscal framework will be directed to agriculture and economic activity in townships and rural areas, particularly black commercial farmers to enhance their access to the food value chain and with a focus on export orientated crops that are highly labour orientated, with government signing 30 year leases in order to mobilise funding. An advisory panel on land reform, chaired by the Deputy President, is to be appointed with a fair and equitable land policy.

 

There will be redirection to ignite economic activity to townships and rural areas with 26 township industrial parks to act as catalysts, with the establishment of a township and rural entrepreneurial fund, redirecting resources towards challenges in health (filling critical empty posts) and education, with additional funding towards sanitation in public schools and other projects.

 

Presidential Infrastructure Coordination Counsel

Additionally, government will prioritise infrastructure spend and maintenance, to end the tapering down of infrastructure spend in order to unlock new jobs via an SA infrastructure mega fund as Government seeks meaningful relationships with the private sector for delivery. A dedicated infrastructure team of specialists in the Presidency (PICC – Presidential Infrastructure Coordination Counsel) will be established, with improved coordination across the three spheres (government, labour, and business). SA will allocate R400bn to the infrastructure fund for infrastructure spend over the next four years, via blended finance (including equity, quasi-equity, debt, structured bonds and other financial instruments as well as investments from pension funds and other private sector investment). The investment summit on 26th October will provide further details.

 

Funds will come from underperforming projects, with the infrastructure drive focusing on roads, dams, water infrastructure, human settlements, school, public transport, and student accommodation. The IDC will increase its approvals to R20bn over twelve months, 20% y/y increase to target productive sectors of the economy including manufacturing, mining and industrial infrastructure and sectors under distress in order reverse GDP decline.

 

The plan identifies 57 priority pilot municipalities across the nine provinces of the economy in the short term (recognising service delivery protests) including refuse sites, sanitation, electricity reticulation, water reservoirs, with a series of interventions to ensure growth is labour intensive and young people are included in this job creation. The employment tax incentive is to be extended by ten years and have wider reach, greater support for public employment programmes and the textile sector, with UIF funds used to focus on labour activation programmes. The upcoming jobs summit will provide further details.

 

Partnership and collaboration with the private sector and labour are key to restore economic growth in the short-term and prepare the ground for sustainable inclusive growth in the future. Government work with initiatives, such as the CEO Initiative, will persist. A new path of jobs, growth, and trajectory of transformation will be forged, with the ERSP (Economic Stimulus and Recovery Plan) looking to be an improvement on the previous New Growth Path (NGP).

 

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Within the tight fiscal space, government will not see increased expenditure, but rather spend on more productive economic areas. Finance Minister Nene added that, in conjunction with the department of performance monitoring and evaluation, underperforming programmes which may have been priorities in the past will no longer be prioritised, with preference given to high growth, high impact programs. Further details will be provided in the MTBPS. Implementation is immediate, and more detail will be provided on the five areas of focus of the ERSP.

 

In the close to a decade of the previous Presidency, the persistence of legislative, political and regulatory uncertainty was a key contributor to weak economic growth, and by extension to higher unemployment. Policy uncertainty was perceived to have restrained private sector investment which ultimately dampened potential economic growth and particularly suppressed business confidence. Indeed, this has resulted in such low economic growth that in the first half of this year SA recorded a recession purely on normal volatility in the agriculture sector, even though the agricultural sector is one of the smallest components of GDP. Excluding agriculture, SA did not record a recession in H1.18.

 

New track to economic prosperity

Now, President Ramaphosa, in a proposed close unity with business, government and labour (the three spheres) is taking a new track to economic prosperity, with a reduced focus on infrastructure spend from SOEs (where much state capture and corruption has been perceived to have occurred) and a greater focus on international norms used in successfully lifting economic growth and raising the income levels for the bulk of SA citizens.

 

South Africa is classified as a middle-income economy, but the citizens themselves do not, by and large, fall into the middle-income bracket, enduring low-income levels and poverty instead which South Arica’s latest growth plan, the ERSP, actually could have a real likelihood of changing. This is due to the tight financial and performance controls that will likely be driven by Nene, Ramaphosa, and Gordhan, giving the private sector and markets confidence on the avoidance of leakages of monies from the system.

 

With the President’s strong business acumen, tight financial controls, labour participation and support, substantial private sector investment involvement and successful financial vehicles SA has a chance of lifting GDP growth to 5% in the medium term, and out of recession in the second half of this year, and into economic growth of around 2.0% next year.

 

Markets greeted the ERSP with some enthusiasm, with the rand strengthening towards R14.20/USD, R16.73/EUR, and R18.75/GBP, from yesterday’s close of R14.29/USD, R16.78/EUR and R18.79/GBP. However, much of the rand appreciation this week, from R15.00/USD, R17.44/EUR and R19.62/GBP on Monday, has been a result of USD weakness. This followed heightened concerns over future US economic growth on the intensification in trade tensions between China and the US. A 10% tariff on US$200bn of Chinese imports becomes effective from Monday, with the tariff rising to 25% at year-end. The USD weakened to 1.18 to the euro.

 

China retaliated with proposals of new tariffs of 5% to 10% on imports of US$60bn worth of US goods, despite the US warning that it would impose tariffs on a further US$267bn worth of imports from China should there be any retaliation. The deterioration in the US-SINO trade relations is increasing in severity, risking an outright, destructive trade war as the US President aims to change China’s trade behavior.

 

The rand has weakened since the ERSP announcement this morning to R14.39/USD, R16.93/EUR, and R19.02/GBP on ongoing concern around the SARB’s independence with two conflicting statements seemingly issued by government recently.

About the author

Annabel Bishop

Annabel Bishop

Chief Economist of Investec Ltd

Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.