World Economy

Next budget moves will 'make or break' South African economy amid second recession in 2 years

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Key Points
  • Figures from Statistics South Africa (Stats SA) confirmed that agriculture, transport and construction contracted on a quarterly basis by 7.6%, 7.2% and 5.9% respectively, while electricity declined by 4% and retail 3.8%.
  • The seasonally adjusted Absa PMI (purchasing managers' index), a closely-watched gauge of economic sentiment, dropped to 44.3 in February, the lowest reading since the economic recession in 2009.
  • In last week's National Budget, Finance Minister Tito Mboweni announced that the government wanted to cut the public sector wage bill by 160.2 billion South African rand ($10.5 billion) over the next three years.
South African President Cyril Ramaphosa addresses the crowd gathered at the Miki Yili Stadium, ahead of the celebrations for the 25th anniversary of Freedom Day, in Makhanda, Eastern Cape Province on April 27, 2019.
MICHELE SPATARI | AFP | Getty Images

South Africa slid into its second recession in two years in the final quarter of 2019, as the economy shrank 1.4% following a revised 0.8% contraction in the third quarter.

This far surpassed the 0.1% quarter-on-quarter contraction anticipated by economists in a Reuters poll.

Figures from Statistics South Africa (Stats SA) confirmed that agriculture, transport and construction contracted on a quarterly basis by 7.6%, 7.2% and 5.9% respectively, while electricity declined by 4% and retail 3.8%.

GDP (gross domestic product) shrank 0.5% year-on-year in the fourth quarter following a 0.1% third-quarter expansion, and the South African economy posted an anemic 0.2% expansion across the calendar year, down from 0.8% in 2018. The Treasury has also cut its growth forecast to 0.9% for 2020.

What's more, the seasonally adjusted Absa PMI (purchasing managers' index), a closely-watched gauge of economic sentiment, dropped to 44.3 in February, the lowest reading since the economic recession in 2009.

South Africans continue to endure frequent blackouts, further hampering economic growth, and the country has been in energy deficit since 2005 owing to debt-laden state utility Eskom's failure to meet demand. Eskom has become reliant on state bailouts for survival.

"Other reforms and strategic plans talked up by the government have either not materialized at all or have been watered down, including bold talk of privatization and other measures to kick-start a non-state economy," NKC African Economics Senior Political Analyst Gary van Staden said in a research note Monday.

Sluggish performance in business activity and new sales orders offered further evidence that businesses are feeling the strain, while the headline data shows that purchasing managers do not yet see a light at the end of South Africa's economic tunnel.

'Make or break'

President Cyril Ramaphosa wrote in a newsletter on Monday that he was "heartened by the willingness of all parties to engage in serious negotiations aimed at finding a solution" to the issue of cutting the public sector wage bill.

This was at odds with the trade union federation Cosatu's statement on Friday, which called the wage plan "worse than apartheid" and "a declaration of war."

In last week's National Budget, Finance Minister Tito Mboweni announced that the government wanted to cut the public sector wage bill by 160.2 billion South African rand ($10.5 billion) over the next three years. The government had already announced intentions to renegotiate the last tranche of a current three-year pay agreement with public sector unions, evoking further ire.

Ramaphosa ascended to power in 2018 promising sweeping reforms, but the pace of implementation has been labored, not least due to internal disputes within his ruling ANC.

A freight train leaves an Eskom power plant in Hendrina, South Africa, on February 22, 2018, after having discharged its load of coal.
Marco Longari | AFP | Getty Images

In Monday's newsletter, the president said the government had made a "deliberate decision not to pursue the path of austerity" in order to avoid compromising growth plans and stoking social tensions, the latter of which seems not to have gone to plan.

Van Staden highlighted that there is widespread skepticism, including from ratings agency Moody's, which holds South Africa's last remaining investment-grade credit rating, that the government can implement the cuts or renegotiate bargaining agreements.

"Cosatu and others opposed to the proposals are well aware there is no consensus in government or the ANC on key policy issues, including this one, and they will exploit this weakness," van Staden said in the note, entitled "Next budget moves will be make or break."

"The conflict also presents opportunities for the factions in the ANC and the alliance opposed to Mr Ramaphosa to stymie his plans."

Meetings of the ANC's national working committee (NWC) are ongoing, and van Staden said the gatherings could reintroduce the notion that opponents of Mboweni's plan can either unite to make it work or "face the possibility of a negotiated settlement with bondholders (or, in extremis, with the IMF)" and its implications.