Tag Archives: South Africa economy

South Africa’s economy is facing crisis risks (Part 3)

Economists and public finance experts have not yet reached a consensus on the specific acceptable debt threshold.

However, it is clear that the higher the ratio of public debt to the size of the economy, the greater the risk. This is especially true when economic growth is lackluster, and this low level of growth has taken place in South Africa over the past several years. Recent developments have made the situation even more gloomy.

In the 2019 budget estimate, the South African State Treasury indicated that it may be forced to exceed the spending ceiling for the first time to provide the National Power Company of Eskom with a $1.5 billion bailout year for the next 10 years. The above measure should be implemented even when other plans have been implemented, including job cuts in public services and additional tax measures.

Since then, the National Energy Regulatory Authority (NERSA) has allowed Eskom to enjoy lower than expected tax increases. The South African government has also proposed additional support to Eskom more than 4 billion USD in the next 2 years.

The South African government does not seem to be able to cut such large sums in other regions to make up for this. Despite the money being poured into Eskom, there has not been any indication that the company’s overall plan to stabilize its finances has been given.

Meanwhile, South Africa is still facing many other financial risks. Economic growth and job creation are negligible and both are below the population growth. This means a higher unemployment rate and a decrease in per capita income. Faced with the Eskom crisis in both public finance and economic growth, the only way to rise is to ensure social consensus.

President Ramaphosa has his own weapons to achieve a “social agreement” of this type but the head of the South African Government acts too slowly. This may be partly due to the constant factional battle at the ANC and the unprecedented attack on President Ramaphosa and his close allies such as Public Business Minister Pravin Gordhan. This country inspection is underway.

 

 

 

 

 

 

South Africa’s economy is facing crisis risks (Part 2)

The economic downturn is often attributed to the causes before President Ramaphosa succeeded Jacob Zuma in February 2018. Admittedly, President Ramaphosa was unable to save himself by making commitments, such as creating jobs – which were beyond the ability of the Government.

Realizing why these commitments are not exactly the key factors to blame and assess the cause of the status quo, as well as the next direction for South Africa.

Unfortunately, aside from the blame, the majority of policy discussions consist only of vicious disagreements. This is related to the time the government was held by the African National Congress (ANC) through the “Growth, employment and redistribution” strategy (GEAR), which was held by coalition partner right to oppose and criticize. The GEAR strategy is primarily intended to reduce the levels of debt that the new democratic government must receive from racism.

Left-wing commentators have long advocated expansionary fiscal policy, which means a significant increase in government spending. The group also asked the State Treasury to implement a “austerity” policy after 2008. This is not logical. First, after 2008, South Africa actually adopted a “counter-cyclical” approach: Government spending grew faster than revenue – the cause of national debt began to escalate.

Second, increasing government spending in the direction of the proposal, albeit in the best scenario, is a highly risky strategy. In the context of South Africa’s public finances, the increase in spending, which has not brought about significant economic growth and tax revenue, will lead to a serious decline in public finance. That could harm future generations.

The risks seem bigger than this benefit will never be mentioned by populists, because this school simply “mimics” the arguments that have existed in previous periods.

The fact is, although the State Treasury tried to maintain government spending to support the economy after the global financial crisis and then tried to stabilize debt levels by using the ” financial consolidation, ”but that could not work either.

The economy has not recovered and it is attributed to systemic corruption and government failures under President Zuma. Public debt targets are often not met. At one point, the debt of the South African Government was expected to stabilize below 45% of GDP, but now it exceeds 60% and is likely to reach 70% of GDP within the next few years.

 

 

 

 

 

 

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.