ECONOMIC AND BUSINESS OUTLOOK FOR SOUTH AFRICA IN 2012 PRESENTED BY RAYMOND PARSONS DEPUTY CHIEF EXECUTIVE OFFICER BUSINESS UNITY SOUTH AFRICA (BUSA), December 5 2011

INTRODUCTION

As the year draws to a close BUSA as usual offers an assessment of economic and business trends - and the possible outlook for the coming year.  This is based on an evaluation of existing economic data, recent discussions at BUSA's Economic Policy Committee and input from members of BUSA.  What BUSA wishes to do by ‘looking into the crystal ball' is to broadly unpack current economic trends, outline what certain trajectories of the SA economy might be in the immediate future, and identify some of the policies which are relevant to our economic performance. 

This assessment will therefore broadly revolve around -

• external and internal economic factors
• the present and the future
• threats and opportunities
• countercyclical and structural concerns for the SA economy around growth and employment in changed circumstances
• the role of the private sector in promoting SA's economic performance

What strikes BUSA in particular at this juncture is that firstly the risk of the best forecasts by either the public or private sectors turning out to be wrong seems to be much higher now given global uncertainty and secondly, fiscal and monetary policy options for SA will contract or expand depending on growth performance.

In a nutshell, therefore it would seem that

a. the margin for error in economic forecasting has increased;

b. the margin for error in policy has narrowed and a mistake in domestic policy could be costly.

Dealing with the economic outlook is therefore now an exercise in assessing the balance of risks and this has important implications for domestic policy.  The more things go wrong globally, the more SA must look to the efficacy of its domestic policies and its international competitiveness.

THE GLOBAL ECONOMIC OUTLOOK - SLOWER GROWTH AND RISING RISKS

The global economy has entered a dangerous new phase.

Global economic activity has weakened further and become more uneven, confidence has dropped, and downside risks are increasing.  While further bail out arrangements have been proposed for Greece and Italy, the two year Eurozone sovereign debt crisis remains largely unresolved and fears of a ‘double dip' recession have risen.  The Eurozone is now expected to have a mild recession in 2012 according to the latest authoritative OECD survey.

On the most favourable assumptions GDP growth in advanced economies is expected to remain sluggish expanding at 1½ percent in 2011 and 2 percent in 2012 (assumes that European policymakers are able to contain the crisis in the euro area periphery, that U.S. policymakers are able to introduce fiscal reform).

Recent data suggests a slightly more positive outlook for the US economy.

Prospects for emerging market economies have also become more uncertain again, although some economies can counter the effect on output of weaker foreign demand with less policy tightening.  Emerging countries are forecast to achieve relatively rapid growth of 6.8% in 2011 and 6.4% in 2012 and expectations of African economic growth next year remain positive. 

Even after revising the 2012 forecast because of the downturn in developed economies, the IMF still expects subSaharan Africa's economies to expand by 5.75% next year.

A bird's eye view of the global economy therefore suggests that this remains a delicate moment for it, and the crisis is not over until the key economies are creating enough jobs.  The IMF has indicated that it may revise its forecasts for global economic growth yet again.  There remains the concern that - if the downside risks reinforce each other - their cumulative impact could possible trigger stagflation in some advanced economies.  The risk of the Eurozone ‘disintegrating' is also now higher, thanks to financial panic, a rapidly weakening economic outlook, and political brinksmanship.  The next EU ‘Summit' on 9 December 2011 will show whether adequate financial instruments and sufficient political will can be mobilised to effectively resolve the Eurozone crisis. 3. SOME IMPLICATIONS FOR THE SA ECONOMY

In recent months there have been regular downward revisions in growth forecasts for the SA economy in 2011 by the National Treasury, the SA Reserve Bank, BUSA, as well as other analysts.  Growth forecasts have had to be trimmed.  This has also meant adjustments to growth expectations for 2012 and beyond.  Real GDP growth disappointed in the third quarter, expanding at a subdued pace of only 1.4% q-o-q.  Economic activity is likely to improve slightly in the 4 th  quarter. The question is whether the ‘soft patch' will continue into 2012. 

GDP GROWTH

There appears to be a broad convergence between government and BUSA on revised growth forecasts for SA.   The components of SA's economic performance look as follows to BUSA -

Sources:  IMF WEO, & Nedbank, 2011

The SA economy is therefore underperforming.  The economy is presently operating below its potential, with manufacturing capacity utilization at only about 80%, office vacancies over 10% and a high margin of unemployment, especially among the youth.  Growth in overall credit demand has remained subdued around 5% - 6% over the past year and this is not likely to change in the near future.  On present evidence it looks like a 3% GDP trajectory through 2012 is the ‘best-case' scenario.  Positive growth but nonetheless insufficient to meet SA's socio-economic challenges and with a downside risk.  At this rate it will take SA much longer to reach its job creation and other socio-economic targets.   Against this background the following additional implications are identified

• volatility in the exchange rate and SA's trade balance will persist for the time being.  Depending on developments abroad the rand could weaken again if a sustainable practical plan is not devised soon to resolve the Eurozone debt crisis.  ‘Headline' inflation in SA will continue to hover at the upper end of the inflation-target range, though BUSA expects that interest rates will be kept unchanged for the time being, probably well into 2012.  ‘Core' inflation remains well within the target range.  There is little sign of secondary inflation.  A renewed recession in the global economy may even promote a further cut in rates in SA, as recently suggested by the OECD.  There are whirlpools on both sides, not on one only.  If a serious global recession does unfold, then SA's growth rate could well fall below 3% next year; 

• given the vulnerability of the economic recovery and the uncertain global situation there should be no tax ‘shocks' in the Budget which would damage business confidence and harm growth potential.  Aggressive taxation may defeat its own ends by diminishing the income to be taxed. The economy is already feeling the negative impact of the proliferation in ‘stealth taxes', administered prices and user charges.  Keeping state spending under control will continue to require a streamlining of government and of what it delivers.  The general rule should be that government spending should boost growth and reduce poverty;

• as President Zuma has recently again warned, welfare payments cannot continue to grow out of proportion to tax revenues.  There therefore remains a clear and urgent choice for South Africa which is reflected in both the New Growth Path (NGP) and National Development Plan (NDP) roadmaps.  Either strengthen public sector delivery, keeping government affordable and the tax burden reasonable, or face a continued failure to ensure delivery, leading to rising costs, reductions in services and greater financing challenges.  In other words, either real economic growth with all its benefits, or the yoke of low growth and its creeping socio-economic costs, and welfare dependency. We want to turn many more South Africans into a nation of victors over adversity and deprivation, rather than victims trapped on welfare.

IMPORTANCE OF BUSINESS CONFIDENCE

The overall impression to BUSA is that corporate balance sheets are currently strong and clean.  Earnings growth appears to have been positive in several sectors.  Liquidations and insolvencies have declined this year.  The deployment and commitment of corporate resources will nevertheless depend on improved confidence in the business sector to strengthen economic momentum. BUSA believes that policy could not be reduced to ‘rules of thumb' even if we had daily statistics for everything that is required in theory to know.  For behind the figures are motives and psychological factors, and these too have to be assessed. Businesspeople are actuated by various often mixed and not always clear-cut motives - which constitute the ‘business mood'. 

It is therefore necessary to underpin the role of business and investor confidence in order to promote economic recovery.

The important but intangible state of mind, which we call business confidence, is presently weak. -

BUSINESS CONFIDENCE INDEX

(Rand Merchant Bank, December 2011)

PRIVATE FIXED INVESTMENT IS GRADUALLY RISING

CAPITAL EXPENDITURE - LOOKING AHEAD

Public policy is now, correctly, directed in various ways to reexpanding the economy and to reviving where possible the momentum of growth and employment.  SA must concentrate on the factors over which it does have control and which could make a difference to outcomes.  How do we continue to underpin growth?  What useful action does it still lie in our power to take?

SUPPORT FOR ECONOMIC GROWTH, JOB CREATION, AND LONG TERM DEVELOPMENT

Business supports policies that confront the challenges of growth, job creation and competitiveness and bring about real structural change.  We concur that this will be critical in promoting productive investment in key sectors of the economy in the current climate, not only insofar it concerns growth and expansion, but also as it relates to protecting workers and enterprises from the costs of the negative global economic situation.

PROMOTING JOB RETENTION AND ACCELERATING JOB CREATION

Broadly speaking, we are currently particularly engaged in supporting efforts to address unemployment through:

• the NGP discussions under the leadership of Economic Development Minister Ebrahim Patel, where accords on skills development, basic education, local procurement and the green economy have already been finalised;
• the National Economic Development and Labour Council (NEDLAC) where the rural development reforms initiated by Minister Nkwinti's department is currently being discussed;
• the work of the National Planning Commission under Minister Trevor Manuel, where organized business has responded in through various of its formations to the diagnostic document assessment released earlier this year, and will continue to be involved now that the longterm vision for 2030 for public debate and consultation has been released (see section 6 below);
• the Department of Trade and Industry, in terms of the significant facilitation work required to work towards the designation of locally manufactured products to shore up job retention and creation in the domestic manufacturing sector, as well as the implementation of IPAP2;
• BUSA supports the proposal of a youth wage subsidy and is currently engaging with government and other social partners on the Discussion Paper submitted to NEDLAC by National Treasury.  We would like to see its implementation expedited.  We encourage the implementation of the programme subject to proper consultation, and also urge its expansion, should it perform better and more cost-effectively than other employment promotion projects, such as the Expanded Public Works Programme (EPWP).

Recent clarification of progress in respect of the implementation of the R9bn jobs fund announced in the Budget speech earlier this year is welcome, as there has been an overwhelming interest from business in this regard. BUSA reiterates its contention that this incentive should prioritise employment creation in the private sector, as this will be more productive in promoting employment throughout the economy over the medium and long term.

COMPETITIVENESS SUPPORT PACKAGE

The aptly-named ‘competitiveness support fund' is welcomed by business.  Any employment-promoting subsidies will however only be fully useful if we take proactive steps to address the deteriorating base-line competitiveness of the economy.  Investments in the network industries with suitably balanced cost recovery from users as well as the general tax base will go some distance in addressing this over the medium term.  In terms of more immediate relief - particularly for traditionally job-rich sectors such as manufacturing, mining, agro-processing and tourism - the proposal of a R25bn competitiveness support package is a positive development.  Enterprise development, especially for small and emerging business, needs to be at the heart of growth policy.

EXPANSION OF INFRASTRUCTURE INVESTMENT

With deteriorating prospects for the world economy, growing adverse effects on the domestic growth trajectory, a limited tax base, and spending pressure from existing social entitlements, SA's ‘fiscal space' is shrinking.  SA needs to focus on enlarging the tax base by growing the economy. BUSA therefore supports changing the composition of government spending to help the economy to grow and create jobs by putting greater emphasis on productive investment, especially public investment.

GENERAL COMMENTS

Business thus appreciates the notable increase in public   investment in infrastructure over the years (from R67.5bn in 2005 to more than R140bn today).  We also concur with the stated intention to improve the focus on investment to increase the productive capacity of the economy to support growth, employment, ultimately, also our ability to repay debt and to recover from our current economic position.  In this regard, building on existing efforts to invest in the network industries (energy, water, transport and communications) is appropriate. 

We again support the intention to apply sustainable borrowing in a more determined manner to capital investment, rather than for the purposes of government consumption. The National Treasury's acknowledgement that ‘infrastructure spending by many national and provincial departments and municipalities has lagged behind budget allocations' is in line with business' observations, as the intended levels of capital spend is often not mirrored in terms of contracts put out to tender.  We therefore welcome efforts to strengthen the management of capital budgets and construction contracts.

ADMINISTERED PRICES

BUSA agrees with Finance Minister Gordhan in the MTBPS that ‘it is important to find the right balance between cost recovery from users of services, and general tax-funding'.  The need for this balance to be critically interrogated exists particularly where past underinvestment has resulted in a rapid escalation of costs to users, thus eroding the base competitiveness of the business environment. Rapid and high cost increases for electricity, water and port charges are particular examples that have impacted heavily on the ability of small businesses and concerns in the priority sectors of mining, agroprocessing and manufacturing to retain jobs.

While business supports the need for better infrastructure, the ‘bunching up' and cumulative effect of excessive rises in administered prices is currently having a negative impact on our economic performance.  It has prevented interest rates from being lowered further and reduces discretionary income.  It is a matter for concern and requires to be urgently addressed.  There needs to be a betterplanned and coordinated approach to the issues of affordability in decisions around administered prices and their effect on the cost of doing business in SA.

PUBLIC PRIVATE PARTNERSHIPS  (PPPS)

There is a universal concern about the challenge of delivery in the public sector and this is relevant to the R802 billion allocated to infrastructure over the MTEF period.  As previously mentioned, the recent MTBPS itself refers to the extent to which infrastructure spend by all three levels of government - especially local government - lags behind budget allocations.  To facilitate delivery we need to experiment with all kinds of new partnerships between the state and private enterprise.

The business community therefore remains concerned that the state is still lacking the capacity to deal with its basic responsibilities or to implement many of its policy commitments.  Major service delivery backlogs at local government level - combined with inefficient and costly state-owned enterprises - are significant growth constraints that impact on job creation. 

If the Developmental State is to entail more involvement in the economy without a major increase in capacity and skills (which are largely located in the private sector), the concern is that basic service delivery will suffer further and that the goals of the developmental state will remain at the level of lip service.  Unless the issue of state capacity continues to be frankly addressed, it will be impossible to get good scenarios.  Extraordinary discipline and persistence are required to defeat the cynics.

Business sees the use of public private partnerships (PPPs) as a well-understood alternative to assist in leveraging private sector capacity to accelerate the roll-out of infrastructure and to ensure the effective utilization of government's budgeted infrastructure spend.  There are, however, concerns that this mechanism is not being sufficiently used to produce outcomes in which the private sector can play a decisive role.

The official forecast over the medium-term for the use of PPPs is marginal.  While the value of infrastructure delivered by public-privatepartnerships increased from 2006/7 to a peak of 5.9% in 2009/10, the contribution is set to decline over the medium-term, according to Treasury forecasts, to a mere 2% in 2012/13.  The cumulative public sector infrastructure spend between 2006/7 and 2012/13 will be in the region of R1.47 trillion yet of this cumulative total, only R51 billion was or will be budgeted for delivery by way of PPPs.  Over the period spending involving a PPP constituted an average of 3.3% of total infrastructure spend each year.

TOTAL PPP SPEND BETWEEN 1990 AND 2010 AS A PERCENTAGE OF 2010 GDP

[No graph provided]

Source: WB PPI database (2011) and IMF (2011)

The graph shows that:

South Africa spent on average 0.6% of annual GDP on PPPs between 1994 and 2010, while India spent on average 1.1%, Brazil 0.8%, India 1.1% and Thailand 1.1% of GDP over the period 1990 to 2010.

South Africa lags all the other countries in terms of spend in both narrow and broad categories from 1990 to 2010 as a percentage of 2010 GDP for the selected countries.

There is real interest from the private sector in more PPPs and a strong official commitment in this regard would therefore be welcome.  We believe that strengthening the flow and predictability would further improve this interest in assisting with, for instance, the expeditious roll-out of quality infrastructure.  It would also open the door for engagement on the high transaction costs that the current ambivalence with respect of PPPs (which may for instance result in the suspension of bids or protracted delays in financial closure) has to effect. 

We acknowledge significant facilitation work is required with the implementation of PPPs which places pressure on the technical capacity of national line departments, provincial governments and municipal governments.  Business would welcome opportunities to assist in this regard, especially through the National Treasury PPP Unit.

PRELIMINARY RESPONSE TO NATIONAL DEVELOPMENT PLAN (NDP)

The recently released NDP, together with the current NGP, will play a vital role in decision-making and in shaping the policy environment in 2012 at a crucial stage in the business cycle. Business continues to need a policy framework which enhances certainty and predictability, thus strengthening investor confidence.

Business has broadly welcomed the NDP drafted by the National Planning Commission.  The NDP is solution-oriented and action-driven, especially through its emphasis on unemployment and education.  Its key economic targets converge on what it regards as the ‘best case' scenario for SA by 2030.  The NDP sees the dangers of not reaching our socioeconomic aims as being (a) social and political unrest or instability and (b) creating room for radical populist policies.

The NDP has the following key economic targets

• Unemployment decreases: 27% (2011), 14% (2020), 6% (2030)
• Employment increases from 13 mil to 24 mil
• Labour force participation increasing from 54% to 65%
• GDP increasing 2.7 times at average rate of 5.4% per annum
• Per capita GDP increases from R50 000 to R110 000
• Proportion of income earned by bottom 40% increases from 6% to 10%
• Exports grow at 6% per annum (non-traditional exports increase by 10%)
• Saving rate increases from 15% to 25%
• Investment / GDP ratio increases from 17% to 30%
• Public sector investment / GDP increases to 10%
• Public employment programmes: 1 mil by 2015 and 2 mil by 2030

Can the NDP succeed?  Will it succeed?  The following are relevant considerations -

• it represents a substantial point of departure and embodies the main economic elements for higher inclusive job-rich economic growth by 2030;
• it introduces important spatial dimensions to the economic debate which did not exist before;
• it needs to talk to other programs such as the New Growth Path to ensure mutual reinforcement and convergence of vision.  The NDP must have coherent links to other economic policy and strategic initiatives;
• there are still key issues that need to be decided before the plan can fly.  But the NGP does represent a substantial improvement over its predecessors by being independently researched and covering additional ground.  The NDP has the potential to create a new platform from which to strengthen business and investor confidence;
• it emphasises the importance of an effective and efficient government at all levels in achieving  the 2030 vision.  This implies tough political decisions in respect of administrative, managerial and technical skills in order to secure delivery capability in government;
• elaboration is required of the roles of business and labour in the bigger picture and an enlargement of ‘social capital';
• inclusion and active participation of South Africans as citizens is needed in the consultative process.  It is critical that a strategy like the NDP, once agreed, is marketed to all stakeholders - domestic and foreign - as a national vision. Leadership is needed to create, cultivate and eventually perpetuate the belief that SA will ‘deliver' economically on a larger scale in the years ahead.

SUMMARY AND CONCLUSION

A medium term economic recovery is underway in SA but for various internal and external reasons it is less impressive than the 2004-2007 economic upswing.  A number of special ‘push' factors in the previous cycle will not be repeated.  The economic and business outlook for 2012 remains modest but positive.  While the latest growth figures for 3Q 2011 are not a surprise, they also do not promote much comfort.  SA needs to do better than to be on a growth and employment ‘plateau' next year, global economic conditions permitting.

The global economic setbacks come at a time when many of Africa's economies are consistently growing faster than almost any other region of the world.  SA needs to widen and deepen its economic links with the continent to capitalize on what one authoritative publication recently called ‘Africa rising!'  When the world economy - together with commodity prices - experienced recession in 2008, Africa showed considerable resilience.

There is also a strong feeling in the business community that too many previous commitments to well intentioned policies and programmes such as the RDP, GEAR, GDS and ASGISA and JIPSA have led to much talk and little action.  Whilst the need for a well designed long-term growth plan such as the NDP is fully supported, there is a need for concrete action by highly capable teams involving government, business and labour to design programmes and projects that make an immediate impact.

As the recent debt-ceiling fiasco in the US, the continued haggling in the Eurozone over the Greek and Italian debt crisis - and even the long-standing structural problems in the Japanese economy show - the most important lesson is the peril of procrastination.  Unless a country uses its opportunities timeously to change its course through structural change, the options of policymakers to tackle the challenges narrow.

What remains important now for SA is therefore to implement effectively what has been agreed and funded, and to deliver on our promises by building on our economic strengths, identifying our vulnerabilities, and addressing our weaknesses. Funds allocated to capex by the public sector must be effectively spent. Where appropriate more extensive use must be made of public-private sector partnerships to expedite delivery.

As we seek to make our economy bigger, strong and better out of present economic circumstances in the years ahead, we need in summary therefore to -

• sustain the present economic recovery into 2012
• increase the actual and potential real economic growth rate beyond 2012
• finalise and implement policies that will promote higher, jobrich economic growth, especially among the youth
• make the above a collaborative effort by key stakeholders, through social dialogue and other measures This is the overall message that business draws from its experience of 2011 and as SA moves towards a challenging 2012.  2012 promises to be a testing year for the private and public sectors alike and offers a collective challenge.

Issued by BUSA, December 5 2011

Click here to sign up to receive our free daily headline email newsletter