Hopes that 2021 would be SA’s big bounce-back year, with the economy achieving growth rates well above 3% as it leveraged off last year’s Covid-related contraction, are starting to wane.
Most economists are warning of growing downside risks to the 2021 GDP outlook, driven by the absence of a secure vaccine supply, fiscal sustainability issues, the risk of a public sector strike and load-shedding.
Bureau for Economic Research (BER) chief economist Hugo Pienaar is "very concerned" about SA’s failure to secure an adequate supply of vaccines, and warns that the country runs the risk of missing a global recovery.
The global consensus is that 2021 is likely to be a year of two halves. Economic activity is likely to remain constrained in the first half because of strict lockdowns in many regions, says Pienaar. But as vaccination programmes take off, coupled with huge stimulus measures (especially in the US), an improvement in global risk appetite and consumer spending should drive a global recovery. This could provide a useful kicker to SA’s exports in the second half.
Unfortunately, he believes the sole upside risk to SA’s growth outlook — that exports could do better than expected — is unlikely to sufficiently compensate for the growing downside risks centred on the country’s lacklustre vaccine programme.
"There is no longer any doubt that Covid-19 will come in waves," warns the BER. "Countries [that] find themselves at the back of the queue for vaccines face an almost inevitable damaging third, and potentially fourth, wave of the virus."
This means SA may need to resort to further lockdowns during the year, despite the economic devastation this would cause.
"There is also a risk that investors will start to distinguish between those emerging markets that are rolling out mass inoculation programmes and those that are lagging on this front, and at the same time lack the fiscal resources to support economies through further lockdowns," says Pienaar. "On current evidence, SA scores badly on both fronts."
The BER is still forecasting real GDP growth of 3.5% for SA this year, but this assumes the country will avoid a third wave.
Citibank economist Gina Schoeman and BNP Paribas senior economist Jeffrey Schultz are forecasting just 2.9% and 2.5% respectively. Both stress that there is growing downside risk to their forecasts, even though they are already well below the consensus of 3.8% and the Reserve Bank’s 3.5%.
The risk of delays to SA’s vaccine rollout, fiscal unsustainability, the potential for labour market unrest, energy supply constraints and other structural weaknesses underpin BNP’s below-consensus view.
"We have long held the view that SA’s recovery in 2021 would disappoint most expectations," says Schultz.
He believes that many of the structural weaknesses that pushed the economy into recession before the pandemic will scupper the pace of recovery. Chief among these is Eskom.
The utility has warned that the risk of load-shedding will "remain elevated" until at least late 2021, at least while it conducts an intensive maintenance programme to improve its reliability and performance.
Eskom spokesperson Sikonathi Mantshantsha says it is difficult to estimate the potential severity of load-shedding this year, but adds that the benefits of the maintenance regime are already evident.
"By September of 2021, the risk of load-shedding will have been substantially reduced, but not eliminated," he says.
However, he concedes there are limits to what can be achieved with maintenance. The average age of Eskom’s generation plant is 39 years, close to the end of its design life.
Eskom is therefore fully supportive of the government’s efforts to procure 11,800MW of new capacity.
Bringing online new units at Medupi and Kusile power stations will also help, as will repairing the boiler design defects that have hobbled the new plants. This will increase Eskom’s capacity by 8,640MW when complete in 2023.
In addition, Eskom expects an effective 4,200MW of renewable energy from independent producers from bid window four to come on stream in the second half of the year.
"However, given the urgent need for new capacity, SA must kick off the procurement process for additional generation plant as soon as possible," urges Mantshantsha.
Greater urgency is also required to drive SA’s big private-public sector infrastructure rollout plan. SA will need to spend about R1.7-trillion on infrastructure over the next 10 to 15 years. Of that, R50bn is expected to be spent on emergency energy provision in the next 18 months, with a further R100bn spread over the ensuing 12 years.
Futuregrowth portfolio managers Paul Semple and Jason Lightfoot say that while significant private capital is ready and waiting to be invested, there are still questions about the government’s ability to deliver on its side of the partnership.
Countries [that] find themselves at the back of the queue for vaccines face an almost inevitable damaging third, and potentially fourth, wave of the virus
— Bureau for Economic Research
For instance, the private sector is still waiting for the government to implement various policy and regulatory changes, and deal with administrative and credit risk at the municipal level.
Lightfoot points out that for projects in their initial stages, funding is best provided by development finance institutions. Only once these transactions have reached a more bankable point will the plan gain significant momentum.
"It’s coming," he says of the programme, "but not quite yet."
From a timing perspective, Lightfoot estimates it’s likely to take two to five years before SA gets any real fiscal benefit.
In the short term, the Labour Appeal Court’s ruling allowing the government to renege on promised public sector wage increases in 2020 bodes well for fiscal stability. However, the National Treasury must now find at least R10bn for unbudgeted vaccines.
In addition, further support will be needed for state-owned enterprises this year, including the Land Bank and Denel.
"The Treasury cannot hold out forever, unless the government is happy to see entities go to the wall," says Intellidex’s Peter Attard Montalto.
The Treasury has been criticised for failing to budget for a vaccination programme.
Late last year, health minister Zweli Mkhize approached Discovery CEO Adrian Gore to co-ordinate a team to determine what vaccine funding support business could provide.
Under the auspices of Business for SA (B4SA), Gore proposed a plan in which the medical aid industry would cough up R7bn to cover the cost of vaccines for every medical aid member and an equivalent number of non-members — 14-million people in total, or 23% of the population.
The maths is a no-brainer, given that the cost of vaccinating someone is a small fraction of the hospitalisation cost for Covid, he points out. "It’s imposing a saving, not an additional cost, on schemes."
The same thinking applies to SA as a whole: it will be far cheaper to vaccinate the 60%-70% of the population required to achieve herd immunity at about R20bn (at worst) than suffer the ongoing economic devastation and health costs associated with an unchecked pandemic.
Gore concluded that, when pooled, the potential contributions from the government, medical schemes and business in general could "quite easily" fund the required programme.
"Funding isn’t the real limitation, it’s the easy part," he says. "The bigger issue is getting the vaccine and the logistics of rolling it out."
However, there is still no certainty on the funding model, as the Treasury is going through its own processes.
Gore is hopeful that the B4SA partnership model will prevail. But that doesn’t mean medical scheme members will get preferential access to a vaccine. Access will be via a government procurement strategy based on clinical need, not the ability to pay.
Pienaar thinks it’s unfair that the Treasury is taking flak for not budgeting for the vaccine, pointing out that in the run-up to the medium-term budget policy statement in October, it was putting out fires on SAA.
"We’re all criticising the Treasury, but we should criticise the broader cabinet for getting its priorities skewed," he says. "The Treasury should get credit for holding the line on the public sector wage bill."
SA risks missing the global recovery due to its vaccine bungle and other structural constraints
— What it means:
Whether that line will continue to be held in 2021 remains to be seen. Attard Montalto believes public sector wage outcomes will ultimately be decided by the country’s politics, not the courts. In the process, the Treasury — which has budgeted for a three-year wage freeze — "will be tested in how much it stands up to the rest of government".
There is a strong likelihood that the country will experience heightened labour market unrest this year over the proposed wage freeze. While a prolonged public sector strike might not directly reduce the growth rate, it could unnerve investors and further dent confidence and investment.
With local government elections planned for August, BNP expects another politically noisy year, particularly around the removal of politicians accused of corruption, as well as renewed power plays focused on the ANC leadership race, scheduled for 2022.
But, as ever, the pandemic constitutes the biggest risk to the SA economy. Gore says that if SA can get the vaccine rollout to happen quickly, it’ll be a big victory for the country. But that’s a very big "if".
As is the case with the energy and infrastructure programme, it will require a level of urgency and professionalism not yet in evidence from this administration.
Until then, SA is likely to remain an emerging-market laggard.
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