South Africa was already in a precarious economic position and did not need the recent social unrest that engulfed the main provinces of the nation to prove this.
It was bad enough that the economy, according to the IMF, contracted by 7 per cent in 2020 on account of Covid-19 induced shocks in the form of a national lockdown, stoppages to economic activities and the resultant job losses.
The new threat to economic recovery that has emerged looks certain to push the Southern African country over the precipice into economic collapse in the worst case. On the flip side, the best could be making 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 coming out of South Africa which showed protesters looting and wreaking havoc on privately owned businesses.
This was a reminder of the gruesome xenophobic attacks perpetrated in the country and which seemed to get out of hand even for law enforcers.
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.
The crisis was sparked by the arrest and incarceration of the country’s former head of state Jacob G. Zuma. His crime, contempt of court. This is what brought the masses onto the streets in a protest that quickly became a looting spree.
Zuma had made plenty of unspecified threats of what could happen if he were to be prosecuted in speeches to his supporters. With the protests, it would appear that 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. It will be paying for it in the years to come.
Counting the cost…
Tito Mboweni, the country’s now former finance minister estimates that the damage to Ethekwini, formerly known as Durban, alone is in the region of ZAR 15 billion. Not only was this province the epicentre of the violence, it also handles 70 per cent of the country’s imports and is a critical gateway into Africa through its port.
Both KZN and the Gauteng province which were also badly affected by violence are estimated to make up half of the country’s GDP. 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 amount 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 said that 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 the fact 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 the fiscal and economic stimulus to mitigate the adverse effects of the meltdown.
Interrogating the nuts and 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 does not 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 and unemployment
The country has an unsustainably high level of unemployment at 32 per cent. 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 per cent concentration in a country’s income distribution. In a country with a Gini coefficient of 0, everyone receives the same income.
A Gini coefficient of 100 represents 100 per cent concentration in a country’s income distribution. In a country 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, not just the distributions of income. Higher concentrations translate into higher inequality. Lower concentrations mean lower inequality.
The Gini coefficient metric South Africa has attained coupled with the high level of unemployment makes it likely that social unrest will occur again in the future unless there is urgent intervention by the state.
According to the World Bank statistics that cover a period of 21 years 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, the country has progressively scored poorly in terms of inequality. To that end, the government has put in place plans to revive the economy and reduce inequality which it attributes to apartheid.
Poor governance and 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. This is the legacy that the current president Cyril Ramaphosa has inherited. This has had the combined 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 6 months. This stability has come from rising commodity prices. Mining is arguable, if not entirely, the mainstay of the South African economy. The country earns 80 per cent 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. The country is selling more goods, specifically minerals to the rest of the world than it is buying.
Despite the vulnerabilities to the economy from the riots and the pandemic as well as low growth of the former president’s administration, the high prices of commodities bode well for the economic outlook of the country.
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 Covid 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 rating downgrades by global ratings agencies. This will make any sovereign debt issued by the southern African country expensive for it to issue.
Quantitative easing, on the other hand, may not cost anything in terms of financial costs to the 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 is chosen the country will walk a tight rope for the next few years.
The government has instituted in February 2021 what is known as Operation Vulindlela which is a Zulu and Xhosa word that means “to clear the way” or “to make way” and it is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery. It is overseen by Deputy Minister David Masondo who reports directly to President Cyril Ramaphosa. It aims to modernise and transform network industries, including electricity, water, transport, and digital communications. These network industries, they say are the bedrock of economic growth, and 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 in these focus areas, which together represent a bold and ambitious reform agenda to fundamentally change South Africa’s economic trajectory. Operation Vulindlela is not a new plan but aims to ensure the effective implementation of plans that already exist. This initiative though welcome, 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 people would consider it justifiably as one they cannot invest in especially since US$100 invested in the JSE in 2014 would have been worth US$82 by 2019 and given that in 2020 the economy contracted by a staggering 7 per cent that same US$82 will be worth much less in comparison to the exact same investment in the S&P 500 over the same period of time according to Bloomberg.