Persistent electricity shortages, rising government debt, and policy uncertainty will continue to hold back investment and underscore low growth for South Africa in 2020. This is according to a newly-released report.

The Organisation for Economic Co-operation and Development (OECD) report further adds that South Africa’s economy is set to recover progressively from the coronavirus as sectors reopen.

Economic growth

Growth is projected to slump to minus 8.2% in 2020. The report which was released today shows the COVID- 19 pandemic has worsened an already fragile economy. South Africa also has limited economic recovery for the next year.

The OECD report shows that economic activity will fall by 7.5% in 2020 before picking up with Gross Domestic Product (GDP) growth of 2.5% in 2021. Investment, which has been declining over the past two years, will slide to a record low level.

Lockdown and load shedding

The survey indicates that the nationwide lockdown reduced activity in mining, tourism, entertainment and passenger transport sectors to a near-standstill. The report also blames ongoing loadshedding as a risk to the domestic market, while high electricity prices could derail efforts to recovery. The OECD projects debt levels to exceed 100% of GDP in 2022.

Possible second wave of COVID-19

Director of Country Studies and Economics at OECD, Alvaro Pereira, says a second wave of COVID- 19 could spell disaster for the economy.

“If there is a second wave of the virus then growth will be worse. So, basically, we are forecasting GDP contraction this year of 7.5 and 8.2% and fall in GDP will have implications for unemployment.”

Wage bill

The report flagged South Africa’s rising wage bill. It says government could consider indexing public sector wages below inflation for 3 years to reduce the escalating wage bill.

“The government wage bill compared to other countries is higher than average and this causes significant challenge for fiscal sustainability. Wages are relatively high and you have to be prudent in the next few years. We are not arguing for wage cuts but in the next two or three years to allow wages to go slightly lower than inflation.”

The OECD also forecasts that the local economy will recover by 2,5% next year:

Recommendations

A number of recommendations including establishing governance framework for State-Owned Entities (SOEs) has been suggested. Government exposure to SOEs is high and represents a significant risk to debt sustainability and public finances.

The underperformance of SOEs is widespread due to mismanagement, corruption and overstaffing.

“Especially Eskom and SAA, I think it’s very important to show sustainability and diminish the liabilities. Restructuring the SOE’s in the next few months is key and the plans that have been designed I think it’s key to implement them. And if you focus not only on opening up some of these sectors but also focusing on the governance of SOE’s will also be key to restructure some of these SOE’s.”

National Treasury Director-General, Dondo Mogajane says the government needs to make sure that SOEs are properly managed.

“Fiscal sustainability is paramount and we have to make sure that the state-owned companies are properly managed and are on their own able to raise their own capital and perform the developmental mandate bestowed upon them.  So, it’s important that we balance the support that we give and support those that we need to expand and those still critical to the economy and also close down those that are not critical to the economy in the environment that we are in.”

Tourism

OECD recommends streamlining and implementing electronic visa services for international tourists to increase South Africa’s international openness. It also recommends a reduction of red tape to strengthen the integration of the tourism sector into local value chains.

“Sectors like tourism and others have been completely affected and will likely continue to be affected in the next few months.  It’s very important that an extended financial relief program will be extended otherwise a lot of livelihoods and businesses will go out of business. We strongly believe there is huge potential in tourism and you have many natural resources that are attractive to people but there are many areas which you can improve, “says Pereira.

Structural challenges

South Africa participates in 23 OECD bodies and projects and has adopted 23 OECD legal instruments, including areas of anti-corruption, tax, chemicals and science and technology. It is one of the most active among partner countries. The country also has one of the largest social transfer programmes, above the OECD average.

South Africa’s child support grant is one of the largest unconditional cash transfer programmes for children in the world. The country still faces many structural challenges including heightened scrutiny by rating agencies compared to other OECD countries.

The survey recommends lowering of interest rates, providing temporary financial support to households and extending financial relief in hard-hit sectors to reboot the economy.