SA has scored from a post-pandemic hat-trick: strong global growth; supportive domestic fiscal and monetary policies; and an easing of lockdown measures. But achingly slow structural reform, as well as vaccine hesitancy, will likely prevent the country from hitting much higher growth rates.
Instead, SA will probably muddle its way through the next few years of economic challenges, with growth dipping below 2% by 2025 even with some uplift from the global economy.
This is according to a scenario-planning exercise by Herman van Papendorp, head of investment research & asset allocation at Momentum Investments.
Momentum attaches a 65% probability to its "muddle through" scenario. In it, growth averages at about 2% between July 2021 and July 2025 (see graph, blue line), but most of the growth is upfront, and in the longer term it slides to just 1.75%.
Van Papendorp defends his long-term view, saying: "We don’t think the government has to get an awful lot right to achieve annual growth closer to 2% than 1% in the coming years. However … if there are no reforms coming through … the loss in growth momentum will be much more severe than in our expected numbers."
Van Papendorp’s base case assumes SA enjoys a little improvement in the cost and ease of doing business and some private sector investment in renewable energy.
The base-case scenario is in keeping with Bloomberg and Reuters consensus forecasts for real GDP growth of 2% across 2022 and 2023, down from about 5% this year.
In Momentum’s worst-case scenario (the red line) everything goes wrong for SA, with both global and local supports falling away. Globally, a poor pandemic outcome and ineffective global fiscal and monetary policies hurt growth. At the same time, the SA government fails to enact any reforms, causing the country’s potential growth rate to plunge towards zero. A sovereign credit rating downgrade spiral ensues and there is an increased probability of SA needing a bailout from the International Monetary Fund (IMF) or World Bank.
Momentum attaches a 20% probability to this dire outcome.
In Momentum’s best-case scenario (the green line), to which it attaches only a 15% probability, everything goes right. Rapid reforms and a strong global economy push growth towards 4%, allowing SA’s credit rating to edge up towards investment grade.
"We believe that it is most unlikely that all will go wrong or that all will go right both globally and in SA in coming years, hence the much higher probability [attached to] the base case," says Van Papendorp.
"However, we do attach a slightly higher probability to the all-going-wrong scenario than to the all-going-right scenario, partly owing to the reform track record in SA."
The problem is that SA’s ratings outlook remains heavily reliant on the government’s ability to fast-track key structural reforms. But given SA’s sticky medium-term fiscal and growth risks, Momentum believes the bias to the sovereign rating is to the downside.
The company identifies four main factors that will determine which path SA takes — two global and two local.
Globally, the success of the vaccination process, including whether existing vaccines continue to be effective against possible future strains, will be key in determining the pace of global economic growth, says Van Papendorp.
As important will be the way global monetary and fiscal policies evolve and to what extent a rise in protectionism and inflation, and a shift towards localisation policies, detract from the global recovery.
Locally, the two main factors that are likely to determine SA’s performance are the ANC’s electoral outcome and the government’s ability to enact economic reform.
Differing scenarios for the ruling party have been factored into Momentum’s scenarios, covering whether the ANC retains a healthy majority through to it being forced to govern in coalition with the EFF.
"We see the best chance for more aggressive reform implementation when the rising threat to the ANC’s national majority rule spurs the party into action to improve the future economic circumstances of its constituency by starting to contest elections on an economic rather than an ideology ticket," explains Van Papendorp.
Not everyone shares this view, however. In fact, the complete opposite may happen.
Citi economist Gina Schoeman, for instance, fears the ANC’s election drubbing could lead to an increase in what she calls "reactive" policies — like greater social spending and the institution of a basic income grant — rather than "proactive" policies that may have less immediate popular appeal on the surface but will enhance job creation down the line.
Her SA growth forecast is less sanguine than Momentum’s. She sees growth falling off rapidly from 4.8% this year to 2% in 2022, 1.2% in 2023, 1.5% in 2024 and 1.3% in 2025.
This equates to average growth of just 1.5% between 2022 and 2025.
Similarly, the IMF expects growth in SA to average just 1.3% between 2023 and 2026, while the Reserve Bank expects growth to drop precipitously from 5.3% in 2021 to 1.7% in 2022 and 1.8% in 2023, with long-run growth remaining flat in per capita terms.
"SA can muddle through for only so long," says Schoeman. "The country’s rising debt trajectory and the looming 2024 elections — which carry the risk of policy inertia, slow reform and subsequently weak growth — surely mean that something has to give."
At a more granular level, Nedbank chief economist Nicky Weimar warns in a recent research note that SA’s recovery is likely to remain "patchy" next year, as the two main growth drivers — exports and consumer spending — may not have legs.
While SA exports have benefited from the rebound in global demand and the surge in international commodity prices, Weimar expects that as the world normalises, the artificial surge in global demand for goods will gradually reverse.
"Furthermore, China’s growth rate is likely to moderate and change as the country strives to mitigate climate change and reorientate the economy towards high-end manufacturing and services," she says.
"These forces would tend to dampen demand for and prices of commodities, potentially reversing the upturn in domestic exports."
In SA, the drivers of household income also appear "fragile", Weimar argues, given the weak outlook for employment and remuneration.
SA can muddle through for only so long. The country’s rising debt trajectory and the looming 2024 elections … surely mean that something has to give
— Gina Schoeman
SA’s labour market is lagging far behind the recovery in economic activity, with the level of employment still a staggering 1.5-million jobs below pre-pandemic levels. The economy shed more jobs in the second quarter, and pay packages have been cut, causing growth in disposable income to slow to a crawl.
Weimar notes that though the public sector hired more workers during the pandemic, the government’s finances are "too weak" to create more jobs or even sustain employment at these levels. And given that any strategy to stabilise SA’s public finances will require considerable wage restraint, public sector pay is unlikely to provide much of a boost to household spending next year.
In the private sector, real wages shrank by 0.7% a year on average between 2015 and 2019 before imploding –5.4% in 2020. Weimar believes business still lacks confidence in the country’s growth prospects so will continue to exercise tight control over staff and other operating costs, even as conditions normalise.
"If the country speeds up vaccinations, perhaps reaching the bulk of the population by mid-2022, a rebound off a low base is possible for high-contact services, which would accelerate the economic recovery and support renewed job creation," she says.
"If not, the country will remain subject to the sort of lockdowns experienced throughout 2021, which would probably force more firms within these industries over the cliff, dampening economic growth and aggravating unemployment."
Nedbank expects employment to return to pre-pandemic levels only by the second half of 2024.
Rising prices of essentials like food, fuel and energy also pose a risk to growth by eroding households’ purchasing power. Moreover, the Bank is expected to normalise monetary policy from 2022, which would further dampen credit demand and discretionary spending.
Despite this "murky" outlook, households will face these challenges with healthier balance sheets due to slower borrowing and strong asset price growth over the past two years, says Weimar. "This should offer some buffer against the changing financial landscape, helping to sustain borrowing and spending in 2022."
She expects fixed investment activity to turn the corner in 2022, after six years of relentless contraction. But even off this low base, the recovery is likely to be slow and mainly confined to pockets of activity in the renewable energy sector.
Elsewhere, the appetite for expansion is unlikely to improve much, Weimar says, noting that persistent electricity shortages, infrastructure bottlenecks and SA’s unstable social fabric and weak fiscal position will keep hurdle rates for new private projects elevated.
She adds that while the government should make some progress with structural reforms, including through its infrastructure drive, these are unlikely to yield results within the next year, though they could improve the underlying investment environment over three to five years.
The bottom line is that SA will need to sustain growth rates of about 3% a year to make a big dent in unemployment and achieve long-run fiscal sustainability.
Muddling through with growth of 1%-2% is just not going to cut it.
A 2% growth rate for the foreseeable future? We should be so lucky
— What it means:
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