A business-as-usual approach to growth and structural reform isn’t going to cut the mustard

SA wage growth comes in bottom of the log compared to emerging market peers

The United Nation’s International Labour Organisation (ILO) named South Africa (SA) as one of the few Emerging Markets (EM) to experience a real fall in wages in 2020. SA’s economy registered one of the largest falls in nominal and real wage growth in 2020 compared to most of our comparable EM peers – Brazil, Russia, Mexico and parts of CEEMEA). The ILO estimates indicate SA saw a 4.8% fall in real wages (-2.6% nominal) in 2020.

2020 TERS and SRD state support measures only shroud the true effect on South African Businesses and households

When TERS and SRD measures come to an end in April, true household and corporate scarring will show its face. While the recent National Budget Speech painted a better-than-expected picture in terms of Personal Income Tax (PIT) and VAT collections (which came in at 30% and 50% above expectations respectively), TERS and SRD state support measures in 2020 helped prop up consumers and assisted in keeping companies afloat throughout last year. With these measures coming to an end in April (and with the usual lags with this kind of data) we are still likely to see the true impact of COVID-19 and the lockdown on businesses and households. Stats SA’s monthly liquidation stats demonstrate some of what is to come and don’t make for pretty reading, as they remain on a sharply climbing trajectory.

Source: Statistics SA

Tax revenue forecasts could be optimistic

The 2021 Budget Review forecasts growth in PIT averaging 6.8% nominal (2.7% real) over the medium term. We do still worry that the National Treasury’s (NT) tax buoyancy assumptions still look too bullish – for both PIT but also Corporate Income Tax (CIT). Outside of the mining sector right now, corporate SA is suffering severe profitability constraints, with the primary and secondary sectors of the economy’s gross operating surplus at record lows, while the once resilient tertiary sector also suffering a more than 11% deterioration in the last 10 years – chart below.

A business-as-usual approach to growth and structural reform isn’t going to cut the mustard

We are worried that a ‘business as usual approach’ to growth and structural reform isn’t going to cut the mustard in the economy being able to swiftly recover the potential growth losses and severe labour market scarring in the wake of this pandemic. The NT’s growth and revenue assumptions rely heavily, we think, on the swift implementation and coordination of operation Vulindlela. The buck now has to stop with the various ministries to make sure that the growth and revenue assumptions in this latest budget are achieved. While we believe that SA can achieve this, we are yet to see concrete evidence of urgency in most ministries to do what needs to be done.

ENDS