BLSA CEO’s weekly – 16 March
POSTED ON: March 16, 2020 IN by Admin
The measures President Cyril Ramaphosa announced last night to address the coronavirus were as dramatic as they were necessary. Business welcomes the decisive leadership and appreciates his appeal to the business sector and other sectors of society for support. This issue cuts across politics, race and religion and only by uniting as a country can we minimise the damage and then finally overcome it.
It is going to be a shock to our economy even if we are effective in managing the domestic spread of the disease. With our 35 ports closed and so many restrictions on travel and public gatherings within the country, the impact on our fragile economy is, unfortunately, going to be significant.
Many of our major trading partners have been severely affected. South African exports are piling up at ports while our importers struggle to receive goods from countries where production has been disrupted.
So this is both a supply shock with goods and services unable to be delivered and a demand shock with consumers and businesses unable to consume.
At a panel BLSA hosted last week of leaders in the financial services industry, it was made clear that we will face an economic shock, with the only uncertainty being how severe it will be. While the economic outlook for this year was already weak, with growth forecasts of around 0.1 to 0.3%, the panellists anticipate the coronavirus impact could tip this negative, potentially to worse than -1%. For the financial sector there will also be a credit shock as banks and others react to the weakened financial positions of counterparts.
The problem is that, unlike the disruption caused by the global financial crisis, our economic immune system is currently very weak. In 2007 as the financial crisis hit, we’d had several years of strong economic growth, topping 5%. In 2007 there was a budget surplus and one was anticipated for 2008. Moody’s rated us three notches above the investment grade line. That meant government could launch a major stimulus package in the face of the crisis, which largely allowed South Africa to escape the worst of the economic consequences. But this time we are in no such state. We have faced declining per capita economic growth for four years. Government debt levels are at record levels and public spending is being cut.
There are, of course, monetary levers that can be pulled by lowering interest rates to support the economy and the Reserve Bank will respond on that front. But the fiscal space used during the financial crisis is no longer available.
There are still things that can be done in its stead but now they are urgent. The president now needs to announce a stimulus package to allow us to confront the virus aggressively, as political leaders have done in Europe, Japan and elsewhere. Without any fiscal space, the president can and must instead focus on the structural reforms that the economy urgently needs – reforms that will spark economic activity that has been frustrated by policy uncertainty and other constraints.
That should include immediate moves to open up energy generation. While regulatory processes have to be followed by the National Electricity Regulator of SA in providing for new generation, Nersa should be engaged to accelerate these as much as possible. Fixing Eskom of course is important, but there is little faith that can happen soon enough to change anything – we must drive the alternative production, from household rooftop solar to large-scale production by large energy consumers and round five of the IPP Programme. Much-talked about opportunities for infrastructure investment can be accelerated too – we do not need the perfect framework, only for the “shovel ready” projects that the president talked of in his state of the nation address to be brought to market. The private sector is ready to invest – we just need the projects.
The president can also stimulate economic activity by settling disputes over mining regulation – government can easily unlock billions in investment by giving the industry the regulatory certainty it craves. We can also accelerate spectrum auctions by engaging with Icasa with the same spirit of engagement with Nersa. Progress on access to visas to bring in skills would also help the investment case.
These steps can be part of a stimulus package with clear deadlines for implementation. Business can immediately respond by preparing for the opportunities that these reforms will bring and investing. That is the best chance we have to be able to ride out the economic storm that is approaching.
As the epidemic unfolds, we need public health experts to be at the forefront. This must be a collaborative public exercise that does not stigmatise anyone. Business must work with public health officials to implement optimal policies to limit the spread of the disease. We have learned from social health emergencies in the past, turning the tide on the HIV/Aids pandemic by embracing evidence-based, community-level interventions at scale, for example. The challenge ahead is as significant.
The Reserve Bank’s monetary policy committee meeting may well cut interest rates at its meeting this week. Should that come to pass despite a worryingly weak local currency, we must understand that monetary policy is no panacea to our growth problems. Far from it, if you consider just how many South Africans are really affected by the rise or lowering of lending costs. It’s a tiny proportion.
The greater stimulus to our economy in this troubling time is to keep our focus on the structural reforms promised, particularly in the energy and communication sectors. Click here for my thoughts on measures that can be taken in the short term to stimulate the economy.
I found the recent briefing by national director of public prosecutions Shamila Batohi and NPA investigative directorate head Hermione Cronje to parliament’s justice and correctional services committee instructive.
I wrote in this letter last week about the importance of consequences for the criminal behaviour that took place during state capture and, like most South Africans, I’ve been frustrated that we have not been seeing prosecutions. But the ruin of the NPA was a key part of the strategy of the architects of state capture and it is taking time to repair it. Cronje said critical issues needed to be solved first, such as building the directorate’s cyber capability and data analytics capacity in order to establish evidence. “There are no quick fixes, no short cuts,” she emphasised. And Batohi explained that there was so much corruption across the government, including at municipal level and in state-owned enterprises, that it was necessary to prioritise.
That emphasises the importance of Finance Minister Tito Mboweni’s allocation of an additional R2.4bn to the NPA, Special Investigating Unit and Directorate for Priority Crime Investigation. Given the overwhelming demands on the state’s resources, well done to the minister for still allocating a portion to the NPA. It’s work is critical to the future wellbeing of our country: successfully prosecuting the corrupt culprits of state capture is an important element to ensuring our limited state coffers are never plundered again. I wrote about this and other important crime-fighting initiatives in which BLSA is involved here.
One of those crime-fighting initiatives is against Illicit trade. It is one of the biggest contributors to the strain that South Africa’s fiscus is experiencing, with the country losing about R250m a day in tax revenue as a direct result, according to Tax Justice South Africa. Engineering News captured my thoughts on the issue here.
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