Monthly Archives: January 2020

South Africa’s economy is facing crisis risks (Part 1)

The State Treasury maintained government spending to support the economy after the financial crisis and then stabilized debt levels with fiscal consolidation policies, but they did not work.

The website qz.com recently published an analysis by Professor Seán Mfundza Muller, senior lecturer in economics and senior researcher at the Center for Public Economic and Environmental Research (PEERC) at the University of Johannesburg ( South Africa) about the serious difficulties facing the South African economy. The article has the following content.

South Africa’s public finances are in jeopardy with four main reasons. Firstly, economic growth is low or almost zero. Second, tax revenue continues to be lower than expected. Third, public debt / GDP increased rapidly and is currently at its highest level in the post-apartheid period (1994). Fourth, the ineffective operation of state-owned enterprises has led to the government needing large-scale bailout.

Since the submission of the fiscal year 2019/2020 in February 2019, the economic and financial situation has become worse. If Moody’s international credit rating downgrades South Africa’s investment credit (the other two firms, Fitch and S&P, have rated South Africa’s investment as undeserved – the “junk”) will lead to disbursement of investment capital and exacerbating the problem. In fact, South Africa is lucky because this has not happened.

The current public financial situation in South Africa is the result of many different factors in the three overlapping periods. The first is the period after the 2008 global financial crisis. The second is the second term in office of President Jacob Zuma. Phase 3 is the period since President Cyril Ramaphosa came to power in February 2018. A thorough review of these stages will result in conflict with popular statements in the current political context.

Some argue that South Africa’s current troubles start with the former President Zuma’s reign, but this attribution is incorrect. In public finance, the first shock on the South African economy was the global financial crisis.

Others assess former President Zuma not responsible for poor public financial performance and economy, but this is also not true. In fact, during the time of President Zuma, South Africa’s economic performance was able to recover much higher than it actually was. In addition, government revenue seems to have been negatively affected by the institutional instability of the South African Tax Authority.

Finally, the decline of economic indicators (growth and employment), combined with the inefficiency of budget revenue and public finance, posed a great challenge for President Ramaphosa. That simple fact seems unbelievable.