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.