By David Keeton
THE latest Reserve Bank Quarterly Bulletin confirms the sorry state of the South African economy. It also identifies strong headwinds that will hamper faster growth in the future. Gross domestic product (GDP) growth last year was just 1.3%. In the fourth quarter, it was an even more feeble 0.6%. Our population is growing faster than this, so living standards are falling. Growth must exceed 5% annually before meaningful job creation and progress in reducing poverty and inequality can be achieved.
Structural problems make such a pickup in growth unlikely in the short term. These problems are domestic in nature — we cannot blame global economic difficulties. Our first problem is the sharp rise in government debt. Large budget deficits more than doubled this debt in the past five years, triggering concerns about the government’s ability to repay what it owes. As a result, rating agencies are threatening to downgrade SA’s creditworthiness to "junk".
The recent budget seeks to limit further increases in debt by cutting spending and raising taxes. It is unclear whether this will be sufficient to stave off the feared downgrade of our credit status.
Moreover, interest rates have risen, so the amount the government spends on interest on its debt is rising. Together with tighter controls on overall spending, this will limit the government’s capacity to spend on other goods and services for the next few years. We will not be able to spend our way to more jobs and higher growth.
Households are also highly indebted. Astonishingly, South African households have for 10 consecutive years been negative savers — spending more each year than they earned. Households’ debt is now 78% of their after-tax incomes. Although lower than the 86% recorded in 2008, debt remains very high compared with historical levels closer to 50%. This means households will for the foreseeable future be unable to fund increased spending by borrowing.
As in the case of the government, higher interest rates mean households also face increased interest payments on their debt. Interest payments rose to 9.7% of after-tax income at the end of last year, from 8.5% in 2012. Future rate hikes will push repayments higher still, cutting households’ ability to spend on other goods and services.
The third constraint on growth is a deficit on the current account of the balance of payments with the rest of the world. This deficit was 4.4% of GDP last year and 5.1% in the fourth quarter. Few countries have current account deficits this high. Current account deficits occur because economies spend more on imports than they produce in exports. They are usually high only when economies are growing fast and production cannot keep pace with spending.
It is astonishing that an economy growing as slowly as ours continues to record deficits of such magnitude and that production has failed to rise sufficiently to close the gap between output and spending.
Our current account deficit of R175bn annually must be funded by inflows of capital from the rest of the world. This is becoming increasingly difficult.
It will be even more difficult if our credit rating is downgraded. In these circumstances, sustainable faster growth requires increased output for domestic consumption and exports. We have to produce more goods and services and do so efficiently so that people here and abroad find them both desirable and affordable.
The weaker rand exchange rate has improved the global competitiveness of our businesses. But this has not translated into increased output. This is because business confidence is too low for firms to risk expanding. Government has belatedly recognised the need to restore confidence and is engaged in a series of talks with business aimed at restoring mutual trust. This will take time and progress will be slow without decisive action and determined national leadership.
Given the current political strife, few forecasters expect this to happen, which is why we must expect slow growth this year, and for the foreseeable future.
• Keeton is with the economics department at Rhodes University