Download Tackling South Africas Economic Crisis

The current state of the South African economy
The symptoms of an economy in crisis
The South African economy continues to flail under the ANC government, with no reprieve in sight.
Economic growth remains low, with predicted growth for 2015 at only 2% following on from a dismal
1.5% last year. The official unemployment rate, which currently sits at 25% for the second quarter of
this year (with the real rate of unemployment much higher at 35%) has increased from the official rate
of 23.2% when Jacob Zuma took office in the second quarter of 2009. What this means for everyday
South Africans is that there are fewer economic opportunities to provide for themselves and their
families, with little hope of the situation improving. The graph below illustrates that the upward trend
in the number of unemployed South Africans over Jacob Zuma’s presidency.
Unemployed South Africans
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009
2010
2011
2012
2013
2014
2015
Source: StatsSA figures (in thousands)
The reality is that the South African economy has been slow to recover from the 2008 global economic
downturn due to a number of factors, including many within the government’s control. The graph
below, using data from the International Monetary Fund’s (IMF) World Economic Outlook Update July
2015, shows that South Africa has failed to keep pace with other emerging and developing countries
in terms of economic growth. South Africa has fared particularly poorly, especially when compared to
emerging and developing counterparts in Asia and Sub-Saharan Africa. The ANC government’s
contention that South Africa’s dismal economic performance is a result of external economic
pressures cannot be taken seriously when looking at the growth rates of other developing and
emerging economies facing the same external pressures.
1
Growth rates 2013-2015
9
8
7
6
5
4
3
2
1
0
South Africa Emerging and Emerging and
Developing Developing
Economies*
Asia**
2013
China
2014
India
ASEAN
five***
Sub-Saharan
Africa**
Nigeria
2015-predicted
Source: the International Monetary Fund’s (IMF) World Economic Outlook Update July 2015
* The estimates and projections for this grouping are calculated based on approximately 80 percent of the emerging market
and developing economies.
** The estimates and projections for these grouping are calculated based emerging and developing Asian and Sub-Saharan
African economies
*** Indonesia, Malaysia, Philippines, Thailand, and Vietnam
In fact the majority of the blame for South Africa’s stagnant economy is due to internal constraints
and factors, which can be influenced by the government. The biggest constraint on economic recovery
since 2008 has without doubt been the ongoing electricity crisis, which has led to significant losses to
the economy. Energy expert, Chris Yelland, has estimated that the cost of load-shedding ranges
between R20 and R80 billion per month, depending on the severity of load-shedding , while Bank of
America, Merrill Lynch economist Matt Sharratt estimated that the annual figure for load-shedding
could be an estimated US$17 billion, or some R212.5 billion.
Another factor is volatility in the labour market, related to protracted work stoppages and violent
labour unrest. The ANC’s battles with its Tripartite Alliance partners have not only cost the South
African economy much needed productivity, especially in the mining sector, but have also led to
significant job losses and undermined business sentiment in industry. The government has failed to
intervene meaningfully in any recent labour disputes, either to mediate in instances of violence or
assist with reaching mutually agreeable settlements. Interventions such as these are essential in order
to signal to international markets that the government is committed to resolving labour issues and
ensuring stability for business.
The ANC-led government has also proposed numerous bills recently which will only undermine the
economy’s ability to recover and erode investor confidence. Alarmingly, a number of these bills
contain provisions for the expropriation of private property by the state. Legislation such as this serves
as an extreme disincentive to fixed foreign investment and further weakens sentiment in South Africa.
2
In fact, poor leadership, the electricity crisis, crumbling infrastructure, infrastructure backlogs,
persistent high-level corruption, and a lack of policy clarity have led to ever weakening market
sentiment. This poor perception has resulted in South Africa failing to take advantage of recent
currency depreciation, which should be making foreign investment in South Africa more attractive and
should be boosting foreign trade as our goods and services are now relatively cheaper.
Continued poor fiscal management, including an ever-increasing public sector wage bill which is set
to balloon by between R61 and R66,2 billion over the next three years to reach a staggering R470
billion, has left our country with a large budget deficit, approaching the very limits of fiscal
sustainability and increasing the risk of further credit rating downgrades.
While a number of other countries have been able to reduce their interest rates to spur growth (by
essentially making it cheaper for businesses and individuals to borrow money), South Africa cannot do
so because of government induced price pressures. The government’s poor management of the
electricity crisis has meant back-to-back electricity price increases, an input all businesses have in
common, which have fuelled inflation and crippled the South African Reserve Bank’s ability to lower
interest rates.
There is also reason to worry that about the health of the South Africa’s private sector. Private sector
output and new orders (including in the export market) fell to their lowest levels in a year in July,
according to the Standard Bank Purchasing Managers' Index (PMI), which fell to 48.9 in July from 49.2
the month before. This indicates that the private sector is experiencing increasingly deteriorating
operating conditions. Commodity prices have continued to fall and when coupled with policy
uncertainty and labour disputes, have led to significant job losses in the mining and manufacturing
sectors.
The reality is that the South African economy is now facing the very real threat of stagflation, that is,
a dire combination of low economic growth, rising unemployment, and rising inflation. Fundamentally,
the South African economy is trapped in a low- to zero-growth cycle which requires immediate and
drastic measures to reverse the decline. In an economic environment such as this, the values of
freedom, fairness and opportunity are severely undermined.
3
1. Act now to solve the energy crisis
Boosting generation capacity, load-curtailment agreements, independent power producers and
cogeneration initiatives
The electricity crisis has become one of the most significant binding constraints on the economy.
Although all South Africans have been impacted, the effect on energy-intensive industries has been
catastrophic and thousands of jobs are at risk.
The Department of Trade and Industry must immediately commit an initial R500 million from its
budget for the purchase of industrial-size generators for manufacturing enterprises, via a matching
grant scheme, to keep factories open and productive. This should be done in recognition of the
manufacturing industry’s significance as a vehicle of growth: the sector contributed 13% to nominal
GDP in the first quarter of 2015. The programme should specifically target labour-intensive small- to
medium-sized manufacturing companies, which are particularly vulnerable to business continuity
disruptions. Supplying factories with embedded generation capacity should be combined with
initiatives to improve the energy-efficiency of manufacturing activity, including retrofitting some
buildings and attending to the overdue maintenance and upgrade of equipment.
All electricity suppliers, in particular Eskom and municipalities, should conclude load-curtailment
agreements with their largest consumers so that periods of electricity shortages can be managed in a
more effective manner. This voluntary, pre-determined reduction of consumption will allow
manufacturing firms to better anticipate and manage disruptions to operations, and is preferable to
the total shutdown caused by load-shedding. Some productive activity should be shifted to off-peak
periods, where possible, to regulate demand. Indeed, large well-lit and climate controlled retail spaces
are major electricity consumers, particularly in metropolitan areas, and shifting trading hours can
impact consumption significantly.
For South Africa to take full advantage of independent power producers (IPPs) seeking to enter the
country’s energy market, and in order to promote competition among IPPs, the reintroduction of the
Independent Systems and Market Operator (ISMO) Bill should be prioritised. The ISMO Bill would
remove the operation of the transmission grid from the power utility, Eskom, and place it in a separate
state-owned entity. Furthermore, the ISMO Bill would remove bureaucratic blockages that currently
prevent IPPs from connecting to the grid. This will also boost the growing Renewable Energy
Independent Power Producer Procurement (REIPPP) Programme which is projected to generate
5,000MW of electricity by 2019 and 7,000MW of electricity by 2020.
South Africa should also urgently invest in its industrial cogeneration capacity. The combined
generation of heat and power in a generation facility can save more than 30% of primary energy and
CO2 emissions with fuel and energy sources originating from underlying industrial processes. It is
estimated, that up to 1,800 MW of cogenerating potential can be realised in South Africa over a period
ending 2020. Indeed, fast-tracking of cogeneration initiatives will allow many factories to substitute
some or all of their current energy requirements. Investment in industrial cogeneration in South Africa
also promises improved energy efficiency, as well as environmental and social benefits. Some practical
examples of cogeneration in South Africa include:
•
Cogeneration from Natural Gas at Sasol Synfuels Ltd., generating 286MW;
4
•
•
Cogeneration from Calcium Carbide Furnace Waste Gas at SA Calcium Carbide, generating
8MW; and,
Gas Turbine Tri-generation at MTN, generating 2MW;
2. Sector-specific Interventions
Immediate and bold interventions are required in the Tourism and Mining sectors
Tourism
South Africa’s tourism industry has the potential to be the engine of economic recovery, providing
jobs and economic opportunities for many of the 35% of South Africans who cannot find work.
The Tourism sector constitutes 9% of our GDP and employs 1.5 million South Africans. According to
industry estimates, one job is created for every 12 tourists arriving in South Africa. The equation is
simple – the more tourists we attract to our shores, the more jobs are created.
In order for this potential to be progressively realised, all efforts must be channelled into dismantling
the barriers that are stifling the industry’s ability to create jobs. We cannot allow this labour-intensive
industry to be stymied by unnecessary government measures.
It is against this backdrop that new visa regulations must be assessed. The first set of regulations,
which came into effect in May 2014, requires foreigners who visit South Africa to apply for visas in
person and have their biometric data captured at South African embassies abroad. The second set of
regulations, which took effect in June this year, requires parents and guardians travelling in or out of
the country with children 17 years old or younger to be in possession of an unabridged birth certificate
showing both parents’ details. Both sets of regulations were strongly opposed for presenting an
unprecedented threat to growth within the sector.
Since then, tourism has been on the decline. According to StatsSA, overseas arrivals during the first
quarter of 2015 were down 7%. Arrivals from strategic markets in China and India have dwindled by
38% and 13%, respectively; in the first quarter of this year, South Africa saw only 19,104 arrivals from
these markets, compared to 30,767 over the same period last year.
One of the stated purposes of these regulations is to curb child trafficking, a justified and grave
concern shared by the DA. While Minister Malusi Gigaba claims that 30,000 children are trafficked
each year in South Africa, it appears that his empirical data is woefully inaccurate. Over the three years
starting 2012, the Department of Home Affairs detected 23 victims of child trafficking - a fraction of
the 30,000 claimed by government. Clearly, the rationale which prompted these changes in the
regulations is fundamentally flawed.
Therefore, to strike a balance between our country's safety and security, and the need to boost a highgrowth, labour-absorbing industry like tourism, the DA would immediately take the following action:
•
•
Repeal the requirement in the regulations that makes in-person visa applications for
biometrics mandatory, replacing it with biometrics upon arrival;
Suspend the unabridged birth certificate requirement until a proper evidence-based study
into the scale of child trafficking is completed; and,
5
•
Allocate a significant portion of the Department of Tourism’s budget to an international
marketing campaign to repair the damage done to our tourism industry in recent months.
Mining
The mining sector is a crucial component of our economy. The sector accounts for over 50% of South
Africa’s exports and employs about 440,000 people.
In addition to this, its condition has far reaching effects on other sectors, in particular manufacturing.
A large proportion of our manufacturing sector is “downstream” from the mining sector, as it relies
heavily on the mining sector for raw materials.
The state of the mining sector thus affects the lives of millions of South Africans, directly and indirectly.
Urgent action is required to save South Africa’s mining industry from an ever deepening crisis.
While the DA recognises that significant, structural reforms are required in the mining industry, we
also believe that the sector desperately require the following three interventions to restore business
confidence and stem further job losses:
•
•
•
Assent to the principle of ‘once empowered, always empowered’. Government should agree
that if the current 26% B-BBEE ownership stipulated in the mining charter has been reached
once, the empowerment exercise need not be repeated if B-BBEE owners sell their shares;
Substantively amend the Mineral and Petroleum Resources Development Act (MPRDA) to
address industry concerns. Some of the more alarming provisions will (a) allow the Minister
of Mineral Resources to block exports and force mines to sell minerals at a lower local price,
(b) entitles the state to take over 100% of mining or energy companies, 20% for free and the
other 80% at an agreed price, and (c) empowers the Minister to rule by decree through
“regulations” which can be changed at short notice; and,
Declare an intention not to indiscriminately raise the 26% B-BBEE ownership level in the future
without a thorough review of the success of current empowerment provisions and an
investigation into the impact of such an increase on economic growth and job creation.
None of these steps will require any diversion of state revenue. All three are vital confidence-building
measures. The government must take these steps to illustrate that it indeed recognises the crucial
role the mining sector plays in employment and foreign exchange earnings. Providing more South
Africans with real economic opportunities must take precedence over the ANC’s confused ideological
agenda.
3. Support for small business
Accelerate small businesses by focusing on financing and support, as well as Red Tape reduction
To address South Africa’s unemployment crisis, government must create an enabling environment in
which small business and entrepreneurship can flourish. This is not just the DA’s position, but is also
supported by the National Development Plan (NDP) which rightly notes that small businesses “will
also contribute to changing apartheid legacy patterns of business ownership.”
6
Small, medium and micro-sized enterprises (SMMEs) are the primary absorbers of labour in our
economy, whereas large enterprises - operating in a low economic growth environment - are more
preoccupied with cost containment than job creation.
To date, the Department of Small Business Development and other ministries have focused too
narrowly on procurement as a tool for stimulating small business. This is consistent with government’s
state-centred approach to economic development. Yet South Africa continues to record low levels of
entrepreneurship and high levels of failure among start-ups, despite the creation and generous
funding of multiple government agencies tasked with financing SMMEs.
Interventions in small business should be preoccupied with combining financing with tangible and
effective non-financial support, specifically targeting those enterprises which are poised to grow and
crease job opportunities. The focus should shift from a one-size-fits-all approach to one which
recognises that the type of support needed varies depending on where a business finds itself within
the growth life-cycle. Government interventions have over-emphasised support for micro businesses
with little potential to grow and create jobs. A greater emphasis should be placed on identifying,
nurturing and upscaling new and existing SMMEs with demonstrable growth potential.
It should be recognised that starting and running your own business is one of the hardest things to do,
and that South Africa’s many successful entrepreneurs are a valuable and under-utilised resource. To
this end, we should take immediate action by:
•
•
•
•
•
Offering tax incentives to individual business mentors who shepherd new enterprises;
Amending National Treasury’s Section 12J regulations governing venture capital companies to
stimulate the entry of more players into this sector;
Increasing the proportion of points allocated to skills development and mentorship and
adding job creation to the B-BBEE scorecard;
Establishing a single point of entry for businesses seeking government support. These
Opportunity Centres, operating at local government level, would offer advice, business
registration, training and other services; and,
Forming a streamlined Development Finance Institution targeting small businesses through
the wholesale provision of grants, equity and loans. These would be offered by a network of
private-sector small business incubators, banks, specialist fund managers and venture capital
companies with government assuming the bulk of the risk via a first-loss provision.
Importantly, government has a responsibility to reduce SMMEs’ cost of doing business by identifying
and reducing the regulatory burden and job-destroying Red Tape. This will require the immediate
tabling in Parliament of a private member’s bill, which has been initiated by the DA, that seeks to make
it mandatory for government, inter alia, to prepare a reduced regulatory impact statement that
provides an overview of the expected effectiveness and efficiency of proposed legislation and
regulations. It also provides for the establishment of a regulatory impact assessment (RIA) watchdog
with the mandate to identify and eliminate archaic and obsolete regulations at national, provincial
and local level.
The state has an important role to play in providing or upgrading infrastructure and trading spaces for
small businesses, including those in the informal sector, located in townships, rural and peri-urban
areas. Many successful entrepreneurs cut their teeth trading informally prior to venturing into the
7
formal sector. In addition, working with municipalities to upgrade these informal sector trading places,
the Department of Small Business Development should accelerate the upgrading of township
industrial parks which have received no investment since being established in the 1980s.
The Department of Small Business Development should illustrate its relevancy by engaging other
government departments, notably Finance and Labour, to establish how legislative exemptions can
support and grow SMMEs. Start-ups will benefit greatly from having onerous legal and taxation
requirements progressively phase in as the enterprise grows in size and employee numbers.
Specifically, sections of the Labour Relations Act should only come into effect if and when the number
of people employed by SMMEs reach certain thresholds, thus staggering the cost and administrative
burden of compliance.
4. Labour market reform
Establish a labour regime that protects workers, but not at the expense of work-seekers
It is indisputable that South Africa’s labour relations are in crisis and overdue for reform. Our volatile
labour market brings with it an array of consequences which negatively impact the lives of workers,
as well as those outside the labour force who are looking for a job.
Labour policy must balance the protection of workers’ rights with the need to build greater flexibility
into our labour market to make it easier for businesses to create jobs. If this balance is not achieved,
labour policy is protecting the employed at the expense of the unemployed.
At the heart of formulating an effective economic environment which works as an engine for job
creation, is the need to reposition the manner in which South Africa conducts labour relations. What
is required is a stable labour environment that supports increased productivity and boosts investor
confidence.
In order to stabilise and democratise the labour market, three immediate interventions are required.
Firstly, several sections of the Labour Relations Act (LRA) have to be amended or repealed. These are:
•
Section 32 of the LRA, which allows for the extension of collective bargaining agreements to
non-parties, must be scrapped. The mechanism does not serve its purpose, which is to allow
for collaborative conversations between business and labour. Instead it continues to create
hostility and has become another means to establish economic insiders and outsiders. We
believe that collective bargaining agreements should only apply to entities and organisations
that were party to the agreement. We support a nuanced approach to bargaining agreements
that takes specific conditions, markets, productive sectors and geography into account.
•
Section 26 of the LRA, which allows for closed-shop agreements, must be repealed. A closed
shop agreement, between employers and so-called “representative trade unions”, obliges all
eligible employees in the bargaining unit to become members of the majority union and gives
the representative union the right to collect membership fees from all employees. This
provision is strengthened by others in the Act that deem it fair for an employer to dismiss an
employee who refuses to join the majority union, and gives the majority union the right to
withdraw membership from employees who refuse to participate in a strike. This leaves
individual workers extremely vulnerable and abuses their right not to strike.
8
•
Section 18 of the LRA must be repealed. This section allows majority unions to reach
agreements with employers (or the members of a collective bargaining council) that fix a
minimum threshold of representativeness for a union to gain organisational rights in a
workplace (including rights of access to the workplace, the right to collect membership fees
via the employer’s payroll, and the right of office bearers to take reasonable leave to fulfil
trade union duties). This provision is open to abuse by dominant unions hoping to entrench
their own positions by limiting the activities and membership of new or smaller players.
Secondly, immediate intervention is needed to democratise and better regulate strike balloting
procedures. To this effect, the notice period for a strike should be increased to 14 days coupled with
the introduction of a secret strike ballot within the 14 days’ notice period. Such secret ballot shall
entitle affected workers and unions to strike protection.
Lastly, the LRA should be amended in order to address strike-related violence, which has become far
too widespread in South Africa. Such an amendment will seek to curb strike-related violence by
ensuring unions take responsibility for unprotected and violent strikes. It will also empower courts to
suspend a strike that has become excessively violent by forcing the parties into urgent arbitration.
5. Policy certainty
Assure investors and ratings agencies alike that South Africa is open for business
At the heart of South Africa’s policy uncertainty lies the ideological competition and confusion in the
Tripartite Alliance. This has manifested itself in a proliferation of contradictory plans and policies –
including the National Development Plan, the New Growth Path and the National Democratic
Revolution. The result has been policy incoherence and, ultimately, policy paralysis.
Government continues to display a penchant for blaming South Africa’s flagging economy on external
factors, yet declining business confidence and decreasing levels of foreign direct investment over the
past 18 months testify loudly to the lack of confidence in Africa’s once-largest economy. It is worth
considering comments by the Fitch ratings agency, in June, which noted that “policy proposals
[currently] under discussion … could have an adverse impact on growth, if implemented.” Indeed,
there is currently a raft of poorly conceived and ill-advised bills before Parliament, all of which have
grave consequences for investment, economic growth and job creation by undermining property
rights and the security of contracts.
The DA strongly believes that the following bills pose the biggest risks to the South African economy:
•
•
The Private Security Industry Regulation Amendment (PSIRA) Bill, which limits foreign
ownership of private security companies, puts the country at odds with its commitments to
the World Trade Organisation and places the government in breach of dozens of bilateral
investment treaties. It should simply be scrapped;
The poorly drafted and ambiguous Promotion and Protection of Investment Bill is likely to
deeply undermine South Africa as an investment destination by giving the Minister of Trade
and Industry wide discretion over important areas of legal protection, like investor-state
disputes. The country needs an investment bill that promotes not disincentivizes investment;
9
•
•
•
The Licensing of Business Bill will only create more Red Tape precisely at a time when
businesses, both old and new, decry the already arduous regulatory environment they have
to contend with. It should be abandoned;
South Africa’s long-suffering mining sector, desperately in need of clear rules that govern
mining and conditions that favour the return of investment, is collectively bracing for the
Mineral and Petroleum Resources Development Act (MPRDA). The DA believes that the
MPRDA has serious consequences for mining investment, and cripples the nascent oil and gas
industry. Concerns over its constitutionality must be addressed; and,
The Expropriation Bill, which permits the expropriation of land and other natural resources in
the name of “public interest,” will severely limit South Africa’s ability to present itself as an
attractive investment destination with inviolate property rights. The Constitutionality of this
law is highly questionable and the DA is deeply concerned that the bill, in its current form,
could trigger capital flight that not even South Africa’s exchange controls could contain.
These and similar bills significantly deter foreign investment, decreases job opportunities and increase
the capacity for corruption. All the while, an overbearing state is increasingly using laws and
regulations to coerce and cajole the private sector precisely as the separation between the ruling party
and state blurs.
Conclusion
The parlous state of South Africa’s economy cannot be denied, any more than the fact that the ANC
government has floundered in the face of a growing unemployment crisis. Yet the situation is not
beyond hope and recovery is possible through urgent remedial action.
This document has illustrated some of the emergency measures which can begin to restore South
Africa’s battered reputation as an investment destination, and move towards to economic recovery,
job creation and the realisation of the opportunities ordinary South Africans crave and deserve.
In Parliament, work can begin immediately to:
•
•
•
•
•
•
•
Amend the Labour Relations Act to restore harmony and balance in South Africa’s labour
market, and provide the necessary flexibility to accelerate job creation;
Amend the Promotion and Protection of Investment Bill, the Mineral and Petroleum
Resources Development Act and the Expropriation Bill to reaffirm the commitment to
property rights and Constitutionalism would-be investors will not compromise on;
Scrap the Licensing of Business Bill and Private Security Industry Regulation Amendment Bill
as neither serve the goal of job creation;
Reintroduce and fast-track the Independent Systems and Market Operator Bill to unlock the
potential of independent power producers to alleviate the energy crisis;
Amend the Section 12J regulations governing venture capital companies to stimulate the
entry of more players into this sector investing in high growth potential enterprises;
Target job-killing Red Tape by tabling and passing the DA’s private member’s bill on
mandatory regulatory impact assessments of proposed legislation and regulations; and,
Scrap the new visa regulations which threaten to lay waste to the tourism industry.
10