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GDP figures for the second quarter, released last week, show how much still needs to be done to get the economy going. The headline figure of 0.4% growth, while in line with expectations, simply isn’t good enough if we are to escape our growth trap and start meaningfully improving the lives of South Africans. It was, at least, an improvement from the previous quarter which experienced zero growth.

Within the numbers, there was some evidence that reforms are having a positive effect. Electricity production grew over 3.1% and manufacturing was up 1.1% over the previous quarter, reflecting a far more stable electricity supply scenario. However, there was also evidence of the damage that the logistics crisis is causing, with the primary sector of the economy, which includes mining and agriculture, falling 1.3% from the previous quarter. This is substantially affected by the struggle that producers have in getting output to and through our ports to markets in the rest of the world. The transport economic cluster fell 2.2%.

Also last week, the International Monetary Fund released an assessment of South Africa’s economic performance, calling for the government to implement bold reforms to alter our economic trajectory. It urged the government to build on the existing reform agenda to “increase its ambition and accelerate implementation to put the economy on a permanently higher and more inclusive growth path.” Those reforms are focused on finalising the electricity sector restructuring and getting on top of the logistics crisis by ensuring greater private sector participation. If we are going to meaningfully change the lives of South Africans, growth needs to be above 2% and get back to the records of over 5% set 15 years ago.

The performance yet again highlights how critical it is to fix Transnet, but also last week the state-owned entity revealed another huge financial loss. It lost R7.3bn in the year to end March, up from R5.1bn the year before, though a large part of the loss stems from provisions for litigation which may see Transnet having to refund R9.1bn to clients for previous overcharging. The parastatal did manage a marginal increase in the volumes hauled across its rail network to 151.7-million tonnes. However, it still has some way to go to reach the 170-million tonnes set out in its recovery plan, never mind the 228-million tonnes record it achieved in 2018. Getting closer to those targets must be Transnet’s priority, and accelerating the concessioning of infrastructure to private sector operators will get it there faster. Transnet says it is on track to report a profit next year and is selling non-core assets to help relieve its cash constraints, but it is the volume figures from improved operations that the rest of the economy will be watching most closely.

A sustained and substantial shift in the performance of Transnet is vital to improving the economic growth outlook. It is also critical to driving business sentiment overall. While electricity stability is certainly helping, investors remain unwilling to commit to large new projects. The GDP figures showed gross fixed capital formation falling 1.3% from the already weak previous quarter, and a clear indicator that business is still not willing to put capital at risk. 

It was also interesting to note President Cyril Ramaphosa’s trip to China last week, which seemed positive for our relationship with the country, an enormous market and trading partner. The challenge of course is to improve our terms of trade, which remain heavily biased in favour of China, with manufactured goods flowing to South Africa in exchange for a smaller flow of commodities to China. This is certainly important, but the economic impact of this trade is limited compared to the more balanced basket of goods we export to the West, including vehicles and other manufactured products. While China remains the world’s emerging economic powerhouse, South Africa’s engagement must deliver to its own interests and somehow find a market in China for higher value-added outputs.

Of course, global trade will be substantially enhanced if we can address the logistics crisis that massively affects the transaction costs we face in getting goods to the rest of the world. Structural reforms should ultimately improve competitiveness, supporting export-led growth in the country. Markets everywhere become more accessible, including in China.

The IMF is expecting South African GDP growth of 1% this year and 1.3% next year. I believe we can do better than that if we grasp the political momentum we still have following the national election and direct it toward accelerating reform, enabling the private sector to expand operations knowing it can get higher volumes to markets in the rest of the world. That is what will drive investment, create jobs and expand economic activity. Organised business is a willing partner to government to help realise that vision.

Issued by BLSA