South Africa cuts growth target as economic reality bites

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South Africa’s coalition has cut its growth target, a sign of the enormous pain in Africa’s most industrialised economy despite a charm offensive to convince investors it is turning a corner after a dismal decade.

President Cyril Ramaphosa earlier this month said economic progress since the formation of the new coalition in June meant annual GDP growth could triple to 3 per cent after a decade at less than 1 per cent.

But in the government’s first half-year budget on Wednesday, finance minister Enoch Godongwana cut the growth target for this year to 1.1 per cent from the 1.3 per cent target set by the previous government in February. Over the next three years, he said he expected GDP growth to average 1.8 per cent.

It came after some of South Africa’s top chief executives and several cabinet ministers travelled to New York for the SA Tomorrow roadshow to promote the country as an investment destination to US business.

Ann Bernstein, director of the Johannesburg-based Centre for Development & Enterprise, said Godongwana’s speech was deeply troubling.

“This budget shows just how much trouble the country’s economy is in, and hope and hype aren’t sufficient to change that,” she said. “The country needs to make some hard choices before we can even think of hitting that 3 per cent growth rate.”

Godongwana also said the country would collect R22.3bn less in tax for the financial year to March than it expected in February. It warned that in the next financial year, government debt would rise to R6tn — or 75.5 per cent of GDP — from this year’s R5.6tn.

“This underscores the need for higher inclusive growth,” Godongwana said in his speech. “Debt has risen too fast and is too high.”

South Africa’s 10-party coalition government was formed after Ramaphosa’s African National Congress lost its majority for the first time in May’s election, a reflection of deep anger at the country’s economic performance.

The coalition, which includes the ANC’s traditional pro-market rival the Democratic Alliance, has suffered several rifts but proved more resilient than many expected.

Business leaders have touted improvements, including the fact that South Africa has gone 200 successive days without blackouts following years of devastating electricity shortages.

A more positive business mood has lifted the Johannesburg Stock Exchange’s All Share Index, which has risen 13.1 per cent since the election, while the rand has gained 5.3 per cent against the dollar. Foreign investors have bought a net R84bn worth of South African bonds this year — more than double the R37bn at the same stage last year.

But Leila Fourie, chief executive of the Johannesburg Stock Exchange, who attended this week’s New York roadshow, said foreign investors were cautious about the government’s ability to translate positive sentiment into a real uplift in GDP growth.

“That’s the big question mark, because we have had congenitally low growth over the past decade,” she said. “What investors are wanting is the sustainable delivery of policy promises.”

Nonetheless, she said the signs of a turnaround were clear — including the installation of more than 6GW of private solar energy in the country, and a 36 per cent reduction in waiting times for vessels to dock at ports.

Kenny Fihla, deputy chief executive of the country’s largest bank Standard Bank who was at the roadshow, said the rapid improvements at Eskom, the state-owned power utility, had changed the conversation with investors.

“For the first time in years, the investors we met did not ask us about the electricity crisis, or the problems in our ports,” he said. “Instead, the discussion was around new infrastructure projects being built, and how they could invest.”

Fihla said the bank calculated the improvement in electricity reliability and logistics in port and rail could add 1.5 per cent to South Africa’s GDP, which, along with new investments in infrastructure, could push growth north of 3 per cent.

“But this won’t happen overnight — I think we’re about two to three years away from that.”