South Africa was already in a precarious economic position and did not need the recent social unrest that engulfed its main provinces. It was bad enough that the economy according to the IMF had contracted by 7% in 2020 due to COVID-19 induced shocks through lockdown, stoppages to economic activities and resultant job losses. The new threat to economic recovery that has emerged looks certain to push the country over the precipice to economic collapse in the worst case and in the best case, make its recovery slow and painful. Whichever way the die goes, it remains a serious catch-22 situation. The world watched with shock and horror at images out of South Africa of certain members of that society protesting and subsequently looting and wreaking havoc on privately owned businesses. What had begun as an isolated incident in the country’s KwaZulu Natal province quickly degenerated into a national crisis which has now been called an insurrection and an attempted coup.
It is a matter of perspective which way a person views it; however, central to the crisis and the spark that lit the proverbial keg of dynamite was the arrest and incarceration of the country’s former head of state Jacob Zuma. His crime: contempt of court. This brought masses of people onto the streets to protest, to loot and to commit acts of sabotage. Zuma had made plenty of unspecified threats of what would happen if he were to be prosecuted in speeches to his supporters before and it would appear he made good on his threats in the chaos that ensued. It has however come at a great cost and one that the economy cannot afford to pay immediately and will be paying for it in the years to come.
Counting the costs…
Tito Mboweni, former finance minister estimates the damage to Ethekwini formerly known as Durban alone is in the region of ZAR15 billion. Not only was this province the epicenter of the violence, it also handles 70% of the country’s imports and is a critical gateway into Africa through its port. Both KZN and the Gauteng province which was also badly affected by violence are estimated to make up half of the country’s GDP as many of the businesses that were ransacked will take years to rebuild if at all. The much larger corporations that can afford to absorb the losses will do so at a substantial cost and may have to reduce the number of people that they employ further making an already bad situation worse.
Mr Price, the clothing retailer said that 109 of its stores were looted, and another 539 were closed, while fast-food restaurant operator Famous Brands said 99 stores have been damaged and are non-operational. Cashbuild reported 36 stores have been damaged and looted and are currently unable to trade. According to analysts at Intellidex at least 150,000 jobs are at risk and when one considers that an individual who is formally employed in South Africa has dependents and extended family on average of 10 this means that at least 1.5 million households will be without income.
The long and short of it is that these fateful and unfortunate incidents of violence, riots, looting, the raging pandemic and the already weak macroeconomic fundamentals make it unreasonable to expect any growth to occur in the South African economy at least in the short term. The most reasonable expectation all stakeholders have will be state intervention through fiscal and economic stimulus to mitigate the adverse effects of the meltdown.
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Interrogating the nuts & bolts
South Africa’s economy is complex, intricate, and multifaceted. While the riots have certainly dealt a heavy body blow there are other parts of the economic engine that strangely enough are showing signs of resilience in the face of the turmoil and the pandemic.
Most pundits estimate the quantum of the damage to be in the region of US$5 billion.
Some sectors have fared better than others in this crisis. Tourism is a large foreign exchange earner for the nation. Going forward the sector is expected to recover if looting doesn’t become a recurring event. There is precedent to this assertion. Thailand and Egypt also experienced periods of social unrest and yet their tourism sectors were able to recover rapidly. South Africa’s case will depend on the state’s ability to restore and to maintain law and order.
Inequality & unemployment
The country has an unsustainably high level of unemployment at 32%. It also has one of the most unequal societies with a Gini coefficient standing at .63 for 2021 according to the World Bank.
The Gini index, or Gini coefficient, is a measure of the distribution of income across a population developed by the Italian statistician Corrado Gini in 1912. It is often used as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population.
The Gini coefficient amounts to a kind of percentage and can run from 0 to 100. A Gini of 0 represents 0 percent concentration in a country’s income distribution. With a Gini coefficient of 0, everyone receives the same income.
A Gini coefficient of 100 represents 100 percent concentration in a country’s income distribution. With a Gini of 100, one person receives all the country’s income. Everyone else gets nothing.
A Gini of 50 could mean that half the people share all the income while the other half get nothing. In other words, a country that literally consisted of haves and have-nots in a 50-50 split would have a Gini coefficient of 50.
Gini coefficients can be used to measure the concentration of any distribution, income. Higher concentrations translate into higher inequality. Lower concentrations mean lower inequality.
According to World Bank statistics covering the period from 1993 to 2014 the lowest score in terms of the Gini coefficient post democracy in 1994 and at any other time within that range was in 2000 at 57.8; however, over time South Africa has progressively scored poorly in terms of inequality. To that end government has put in place plans to revive the economy and reduce inequality which it attributes to apartheid.
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Poor governance & corruption
Jacob Zuma’s presidency was largely characterized by slowing economic growth due to a myriad of reasons namely regulatory instability, corruption, and government meddling in state procurement processes resulting in the narrative of state capture – a legacy the current president Cyril Ramaphosa has inherited. This has had the effect of reducing private investment and there can be no economic growth where there is no investment.
Mining and the currency front
The Rand has been relatively stable over the last six months. This stability has come from rising commodity prices. Mining is arguably if not entirely the mainstay of the South African economy. The country earns 80% of its exports from mining.
The high commodity prices have improved the country’s trade balance which is reportedly at the highest it has been in the last 38 years. It is selling more goods, specifically minerals to the rest of the world than it is buying.
A single caveat is in order here which is to ask how sustainable this economic position is.
Commodity prices are expected to remain buoyant on account of planned infrastructure spending in the US and spending and adoption of renewable energy. This will be positive for commodities going forward into the future.
Should this spending materialize it will be the largest since the 1960s and the 1930s before that. Over the last 15 years China has been the largest buyer of commodities, however there is little chance of further acceleration in the appetite for commodities in that country. China’s growth will inevitably slow down and that will translate into reduced demand for commodities.
Whether or not South Africa will manage to fully monetize this advantageous position will depend on the ability of the government to deal with inequality. Economic participation of all citizens should be a major political thrust going forward.
Conclusions: The way forward
The riots experienced last month were a shock to an already ailing economy already plagued by years of low growth and the pandemic. To be able to recover and attract investment will require critical issues like inequality to be addressed as a matter of urgency.
A stimulus package is in order and unavoidable. The path of austerity which had been previously proposed is risky and will not be warmly received.
The path of economic stimulus is not without its risks. All economic stimulus packages must be paid for and depend on the resources a country has at its disposal. South Africa can scarcely afford a massive economic recovery package from its own resources without the need to either borrow or in the worst of cases the creation of more money through quantitative easing.
Financing an economic rescue package through the issuance of debt will be expensive given the country’s poor credit standing evidenced by the persistent ratings downgrades by global ratings agencies. Any sovereign debt issued by the country will make it too expensive for it to issue.
Quantitative easing on the other hand may not cost anything in terms of financial costs to government but it will have long-term undesirable effects which may cause further unrest like inflation and an overheating economy down the road. The country will most likely go the way of a debt financed stimulus plan. Whichever direction chosen South Africa will walk a tight rope for the next few years.
The government has instituted in February 2021 Operation Vulindlela which in Zulu and Xhosa mean “to clear the way.” It is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery. It aims to modernise and transform network industries, including electricity, water, transport, and digital communications. These network industries are essential to creating a globally competitive economy. In addition, reforms to the visa regime are being prioritised to attract skills and promote growth in tourism.
A total of 19 priority reforms have been identified which together represent a bold and ambitious reform agenda to fundamentally change South Africa’s economic trajectory. Operation Vulindlela aims to ensure effective implementation of plans that already exist. This initiative though welcome, its success is time dependent. It will be dependent on how quickly the structural reforms specified in it are implemented and where the money to implement the plan will come from.
Urgent attention needs to be paid to the widening gap between the wealthy and the poor to prevent future unrest and its resultant detrimental effect on the economy. The largest federation of trade unions, COSATU has tabled a proposal for the state to implement a policy of a basic income grant and a disaster relief package aimed at providing economic relief to what it calls the millions of unemployed South Africans and the broadening of township economies. While this would be a welcome gesture should it eventually be implemented a significant component of that DR package should go towards covering some of the losses incurred by the businesses that were looted.
COSATU said that the disaster relief fund must include the following key components:
- Food parcels for affected communities who now have no money or place to buy food.
- Reinstatement of the R350 Covid-19 Grant for all unemployed persons across the country.
- Insurance relief from insurance companies and SASRIA for destroyed businesses and property.
- Unemployment Insurance Fund’s Covid-19 TERS relief for workers from KZN and GP who will now lose wages and jobs as their workplaces have been destroyed.
- Pension withdrawal relief for workers who have lost wages or are struggling.
- Tax and municipal rates relief for affected businesses.
- A revamped Loan Guarantee Scheme to assist companies to rebuild.
- Loan and insurance policy payment holidays for affected workers and businesses.
- Tripling the Presidential Employment Programme’s budget from R11 billion to R33 billion so that it can create at least two million jobs.
- Practical actions by government and businesses to ramp up local procurement to help save countless companies and jobs.
Overall South Africa is proving to be a hard sell to investors both within and outside the country. Most would consider it justifiably as uninvestible especially in light of the current state of affairs.
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