Why Recession Is Still On The Cards For South Africa

Acca’s Edmond Shoko says that in his Budget Speech on Wednesday, Finance Minister Pravin Gordhan did not tackle the fact that the rand seems to be oversold and undervalued

This is because the budget has not brought forward adequate austerity measures that would be reflective of a significant policy change on the part of government, says Shoko.

“In the absence of such policy change, the combination of muted global growth, low business level confidence, drought and persistently low resource prices will result in South Africa continuing to lose its attraction as a destination for capital,” he added.

“Our economy is stalling and the risk of a recession is still a reality.”

For Shoko, the most urgent economic question has been – and possibly still is – whether SA’s sovereign debt is going to be downgraded to junk status.

In his view, the 2016 Budget is factually a “very reactional statement”, which is not indicative of major economic policy changes by the government.

“It has been well crafted to say the right words, terms and figures to avoid the downgrading of our sovereign debt to junk status. It is indeed a missed opportunity because of its short-termism, hollow but clever statements, and primarily its speculative nature,” said Shoko.

On the other hand, in Shoko’s view, the budget shows a positive approach in the realisation that tax is not the only solution to raising additional revenue for the country.

Some key parts of the solution in his budget include expenditure cuts of about R8 billion per year over three years on average, curbing the size of the civil service (although there is no clear plan on how this is going to be achieved), having a growing economy at 1,8% per year on average over three years and creating jobs.

“When it came to the numbers, the only accounted for increase in revenue of R18 billion is underpinned on an increase and introduction in levies. Levies in essence are an indirect tax as they still result in the increase in the cost of living for everyone,” said Shoko.

Gordhan has focused on reining in government spend and amassing income from higher income earners. He made it clear that SA “cannot spend money we do not have”.

Adrian Saville, chief strategist of Citadel, said it is significant that Gordhan did not refer to a “developmental state” – a situation in which the government plays a lead role in driving economic growth. Rather, Gordhan reinforced the message of the National Development Plan of a strong mixed economy with the public sector complementing the private sector.

This focus is important, as it brings stability to policy and will encourage clarity and visibility, the necessary ingredients for an investment-friendly environment.

“What will be critical, however, is to ensure the structural reforms necessary for economic growth are implemented. With the asset base of state-owned entities over R1 trillion, the government sits on the largest balance sheet in the country, but it is being inefficiently managed and we will need extensive financial re-engineering and efficiency to turn it around,” said Saville.

The rand weakened by over 2,5% on Wednesday as Moody’s downgraded Brazil to junk status in the midst of Gordhan’s Budget Speech.

source: Destinyman


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