By Trudi Makhaya, Consulting Economist, Mercantile Bank
The medium term budget highlighted some risks to the fiscal outlook, which are, in essence, risks to the country’s economic performance. If these risks materialise, they would undermine confidence and most likely reduce private sector investment into the economy. There are some important take-aways for entrepreneurs, especially with regards to the potential shocks that might fundamentally change the economic climate.
The government outlines four possible risks to the fiscal scenario, namely macroeconomic, policy and budget execution, contingent and accrued liabilities, and long-term spending commitments. The risks identified are very much in line with the issues that credit ratings agencies tend to highlight when assessing South Africa’s sovereign debt.
- The most significant risk to the fiscal outlook is slower than projected economic growth. The National Treasury forecasts that GDP will grow by 0.6% in 2016 and 1% in 2017.
- Policy and budget execution risks relate to the possibility that the government may be forced to deviate from its expenditure ceiling by unanticipated demands (such as financing to keep university fees constant).
- Contingent and accrued liability risks relate mainly to government guarantees for entities such as Eskom, Sanral, the Post Office and South African Airways.
- Over the long term, the Treasury projects that its social spending on grants and other benefits is sustainable, though demographic changes and the growth trajectory will determine the outcome. An economy that grows less than 2 per cent over time would strain government finances.
The prospect of creating opportunities for greater private sector involvement in service delivery was not advanced much further by this budget policy statement. The government is still working on restructuring the airline sector. This is expected to see the introduction of private investors into the government’s portfolio of aviation assets such as SAA, Mango and SA Express.
Over the past few years, the government has extended various incentive schemes to stimulate private sector investment, such as the Clothing and Textiles Competitiveness Programme, the Manufacturing Competitiveness Enhancement and the Automotive Production and Development Programme. These programmes have come under review in a bid to reduce any ineffective spending. The results of the review process are expected by October 2017.
It is noteworthy that the most optimistic growth scenario projected by the Treasury has as its main feature strong export performance as a result of the Rand’s depreciation. Mending labour relations, investing in human capital and fixing infrastructure are some of the structural reforms that would arguably lift the economy’s growth potential. Some of these measures are contained in the National Development Plan but questions remain about the extent of its implementation across the government.
The pressure on households is likely to continue given a weak economy with limited job creation and wage growth in inflation-adjusted terms. The quarterly employment survey released in October shows that the economy shed 67 000 jobs in the second of 2016, with the total number of the employed coming to 9.21 million in June 2016.
Manufacturing bounced back to 2.2% growth in August, up from a decline of 0.3% in July. Mining production was 0.2% lower in August compared to the previous, albeit a better reading than the -5.4% recorded in July.
The latest indicators continue to show a challenging economic climate for entrepreneurs to navigate. Consumer spending is tapering and the economy continues to operate below its potential. However, there are categories of businesses, such as export-oriented ones and retailers of pharmaceutical, medical goods, cosmetics and toiletries who have experienced positive outcomes.