President Cyril Ramaphosa’s government faces big decisions next year, but the big ones are the same issues it faced this year and the year before, and baulked at taking.
The unexpected Covid-19 pandemic and lockdown this year are an immense caution against any bold predictions for 2021, but there are certain firm trends and binding constraints faced by the country and key big decisions faced by the government.
Ramaphosa has not been the reformer that many of the more generous observers had assumed he would be. He has missed the chance to introduce big-bang reforms time and again. Even with divisions in the African National Congress (ANC), his position as leader carries immense powers of persuasion and patronage that he could have used.
Missed opportunity
The months of ‘Ramaphoria’ after he assumed power in November 2017 presented an ideal moment to cut spending, turn around state enterprises, and change the labour laws. During the lockdown earlier this year, there was a moment of crisis that could have been seized for reform, but it was not taken. While locking down the economy, he might have taken the moment and said we have no option but to go ahead with the key reforms to generate growth – as, with the pandemic, we cannot afford business as usual.
The overriding binding constraint for South Africa is the seeming political impossibility of reform with a government needing to dole out patronage to maintain support. For the moment, this leaves reform dead in the water, and means growth after the Covid-19 lockdown bounce-back will be, at best, pedestrian, and hence tax revenue subdued, bringing a debt trap and its consequences of default far closer.
The world and South Africa will have to bear the costs of this year’s long and harsh Covid-19 lockdown for a long time. Because of its existing weakness, the country is poorly positioned to come out of this crisis well. Growth shows signs of bouncing back in the third quarter, but it is coming off a very low base, and for the year as a whole the economy is likely to shrink by more than seven percent.
South Africa’s Covid-19 support package was the equivalent of ten percent of GDP, which was similar to that spent by a number of developed countries. We will be paying heavily for this in the build-up of debt in the years to come. It also might prove difficult to suddenly cut the increases in grants and other support.
Politically difficult to reduce spending
For the past two years Finance Minister Tito Mboweni has underscored the need for cuts and moves to fiscal consolidation. But he has consistently given way to those who believe in a big active state on the bailouts to SAA and Eskom. Clearly, the Minister is unable to present the sort of budget he wants to because of the political balance within the ANC.
Mboweni’s intention to freeze public sector wages, which is key to financial consolidation, will depend on a court case brought by the unions, as well as sheer political will by the government. For the past decade public wage settlements have been consistently above the inflation rate due to union strength in the public sector. There is a big fight ahead.
Reforms to dismantle the structural causes behind South Africa high unemployment rate have not even been mentioned in reform proposals. Unions and big businesses are able to impose high minimum wage rates on the small companies in industries, which acts as a big disincentive to take on labour. Rampahosa’s plans hinge on the Economic Reconstruction and Recovery Plan, which is largely about infrastructure investment and government-financed job creation
South Africa has lost 2.2 million jobs this year and, with the continued subdued economy and recent rises in minimum wages, these will not return soon. The country cannot afford a centralised bargaining system and a high minimum wage structure for job creation.
Load-shedding likely
When growth perks up next year, a return to load-shedding is highly likely. Eskom, once the locomotive for the country’s growth, will again become an immense drag. As the electricity supplied by independent power producers is largely renewable it will not provide the critical baseload that the economy requires. Expanding the baseload depends heavily on whether the mega power plants at Medupi and Kusile can be turned around. Without massive additional finance and skills, it is likely that Eskom cannot do its job. A badly managed Eskom is also a financial catastrophe in the making, as 60 percent of its debt is government guaranteed. Yet its ability to grow its revenue is hamstrung by poor management and political constraints.
There is one area in which the government cannot afford to slip next year – the roll-out of a Covid-19 vaccination programme. Delays in the roll-out or a ham-fisted vaccination programme would mean new waves of infection, and would act as a curb on the economic recovery. The health department has said it expects to receive its first batch through Covax, the global vaccine distribution scheme, in the second quarter of next year.
The UK began the roll-out of its vaccination programme this week and the US will do so in coming weeks. Yet the government says it can probably only begin a roll-out in South Africa in the second quarter of next year.
Risks of crisis deepening
South Africa’s crisis risks deepening before there are moves to any sort of solution.
An IMF stabilisation programme is probably not a credible means to emerge from this storm as the government would probably lack the political will to implement Fund conditions.
The danger is that the longer the government fails to adjust to new realities, the more it will search for alternatives. That could mean the use of prescribed assets to force pension funds to invest in government debt. Expropriation without compensation could also be forthcoming to appease rising populism and as a means of saying to supporters of the Economic Freedom Fighters that ‘we too’ support these sorts of measures. This would be a draconian line to cross as it would scream out that the government has no respect for the rule of law and property rights. Once such a line is crossed, it will put all private property into play for seizure and wipe out investor confidence.
And then there is nationalisation and potential compromise of Reserve Bank independence. That could lead to public seizure of the foreign exchange reserves of the central bank and a few more years of blow-it-all spending by the government.
The politics have to be right for the big economic adjustment that South Africa faces and that means a long wait for the often predicted reconfiguration of our politics. The pandemic crisis has probably accelerated the move to this realignment but there is no telling when this might occur. So, the prospects of movement toward a favourable reconfiguration of South African politics are perhaps a basis for some Christmas and New Year cheer.
The views of the writers are not necessarily the views of the Daily Friend or the IRR
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Photo by Martin Adams on Unsplash