On Friday 14 September, President Cyril Ramaphosa announced his much-awaited economic stimulus package, which is supposed to “kick-start” the sluggish economy and “ignite” growth. With the economy back in recession and the support for the ANC at a record low seven months before the next general elections, Ramaphosa has to move quickly to prevent the party losing its majority, which would usher in a new period of instability in the form of coalition politics.
The announcement of the plan comes just one week after the release of economic data from Stats SA, which showed that the economy has contracted by 0.7 percent in the second quarter of this year, following on from a 2.6 percent contraction in the first. This means that the economy has now slipped back into recession for the second time in 18 months and the third time since the 2008 world economic crisis.
After creating much anticipation, Ramaphosa announced his “stimulus and recovery” plan to “save” the South African economy – that is: save the profits of big business.
As part of the misnamed “stimulus” plan, the government will shift 50bn rand from other areas of the budget to support economic activity in the agriculture sector particularly. There is also the 400bn rand infrastructure fund. But this too is nothing new. It was already allocated in the existing budget for public infrastructure between 2018 and 2021.
Indeed, there is absolutely nothing new in this plan. Even the South African Chamber of Commerce and Industry admitted this:
"Everything mentioned in the president’s stimulus package has been heard before – in one form or another over the past five years. They, in fact, all form part of government’s existing medium-term strategic framework. The minister of finance and his team has been re-prioritising the budget in line with key priorities since 2011. Education and health already receive a substantial portion of the budget as key social sectors – with most of the funding provided to provincial governments as part of the equitable share and conditional grants.”
The ratings Agency, Fitch was not convinced either, saying:
"Several of the measures relate to existing proposals, and others will take time to finalise and to have an impact. The plan does include measures that could support growth, but many relate to long-standing policy ideas that have been slow to implement."
Other initiatives include opening up the spectrum for telecommunications operators, revising the mining charter to give more “certainty” over requirements for black ownership, and easing visa regulations to make it easier for skilled professionals and tourists to enter South Africa.
This is no “stimulus” package as the president alleges: there are no cuts in interest rates nor the injection of new money. The proposal is to reassign money within the current budget, which already contains severe austerity measures, including cuts and a raise in Value Added Tax. With no room to manoeuvre, Ramaphosa has instead decided to reshuffle the deck and prioritise some sectors over others within the existing budget. It is also not clear from which sectors the money will be moved and what impact that will have on those sectors.
Some economists have looked for a silver lining in the dark cloud by praising the decision not to take on new debt. But this ignores the current levels of debt that are rising to uncontrollable levels. Then there is the point that it is rather difficult to take on new debt when the country’s sovereign credit ratings are on the brink of junk status!
A deep slump
Faced with ballooning government debt, low tax revenue collection, recession and rampant corruption in the public and private sectors, Ramaphosa clearly intends to boost confidence in the economy. But if that was the aim of this plan, it was hardly reflected in the markets.
Moneyweb (25/09/2018) commented:
“When a country introduces a fiscal stimulus package into a struggling economy, currencies and markets normally strengthen in anticipation of faster economic growth, job creation, and market-friendly policies. However, the marginal decline of the rand and muted market reaction on Friday after President Cyril Ramaphosa revealed a stimulus package aimed at putting South Africa’s damaged economy back on course suggests there is scepticism about the state’s intervention.”
This “skepticism” of big business is based on the experience of more than a decade of the economy languishing in a deep slump. The agricultural sector was particularly hard hit recently, shrinking by a massive 29 percent in the second quarter of 2018, after it already contracted by almost 34 percent in the first quarter. The slump was partly due to the drought in the Western Cape, but also due to depressed prices on the world market.
Among the world’s 44 biggest economies tracked by the OECD, South Africa is now the only one in recession. The Reserve Bank expects the economy to grow by a paltry 0.7 percent in 2018. That’s a far cry from the 3 percent that Ramaphosa targeted during his campaign to win control of the ANC in December last year, and the 5 percent targeted by the National Development Plan.
The depth of the crisis is having a devastating effect on society. This decade of very low economic growth has pushed the official unemployment rate to more than 27 percent. The real figure on the expanded definition is closer to 37 percent. This has rapidly increased poverty levels. According to the Poverty Trends Report of Stats SA for 2006 to 2015, more than 30m people are living in poverty and 14m in extreme poverty. Although the Gini coefficient, which measures income inequality (with 0 representing perfect equality and 1 representing absolute inequality), improved from 0.72 (reported in 2006) to 0.68 in 2015, this still makes South Africa one of the most unequal countries in the world.
Headwinds and the emerging market iceberg
Now the economy faces additional headwinds. The volatile rand is back to a two-year low against the dollar and not far behind the volatility of other “emerging market” currencies such as the Turkish lira and the Argentinian peso. In 2018 alone, the Rand has lost 20 percent of its value against the dollar. “Emerging” economies such as South Africa, Brazil, India, Indonesia and Turkey were all impacted when the US Federal Reserve started to roll back its bond-buying program in 2013. The result of ending cheap credit and money printing (quantitative easing) in the US was to limit the flow of speculative investments coming to these markets. Along with the strengthening of the dollar, this means a process of currency depreciation which – combined with rising current account deficits – has and will result in political instability.
The slump in commodity prices and fears of a Chinese slowdown hung like a sword over these economies. Now the crisis in these emerging economies is back with a bang. A stronger dollar, rising interest rates in the US and the fear of an all-out trade war between the US and China are having a severe impact on these countries. From South America to Turkey, Indonesia and South Africa, we have seen currencies fall to record lows, given rising inflation and high unemployment.
Indeed, the South African economy is moving in the same direction as Argentina, which recently had to beg the IMF for an emergency loan. Argentina saw its currency fall by more than 50 percent against the dollar and its interest rates go up by a record 60 percent. A similar crisis is facing Turkey, where the lira lost 40 percent of its value against the dollar this year. These countries are also heavily plagued by debt, which the stronger dollar makes it tougher for them to repay. Now the Federal Reserve is raising interest rates, which means that money is flowing out of the ‘emerging’ economies and back to the US.
In addition to the crisis of the rand, another crisis facing the economy is the rise in crude oil prices. This is having a severe impact in the form of rising fuel prices. This is a major crisis facing the government. In July, the government was so terrified of the social and political consequences of a fuel price hike that it ended up absorbing most of the cost. It was no accident that this happened at the same time that a mass movement erupted in Haiti after a similar hike in fuel prices. But with no fiscal space to manoeuvre, this was clearly unsustainable in the long term. Consequently, South Africans face one of the biggest fuel increases in history. And the government is not able to intervene this time. All it has managed to do is kick the can down the road. Now the working class now has to pay the price.
Then there is the world economy, which is on the brink of another slump – possibly even deeper than the one in 2008 – which could be triggered by any major event on the markets. All of these will have a deep impact on the sluggish South African economy.
Sun sets on the “New Dawn”
The economic crisis has serious political consequences. It is now nine months since Ramaphosa narrowly won the highly contested race to become president of the ANC. But as we reported before, the party is deeply divided with many of its leading bodies, provinces and regions engaged in various factional battles.
In fact, just a week before his economic announcement, Ramaphosa had to fight back against an alleged plot involving former president Zuma and the ANC’s new secretary-general, Ace Magashule, who were allegedly conspiring to remove him as president. It is therefore not clear how much control Ramaphosa has over the ANC. This leads to mistrust and suspicion, which necessarily has an impact on the party’s cadres that are deployed in the state bureaucracy.
When Ramaphosa took over from Zuma in February, he immediately rolled out his counter-reforms, which sought to put the whole burden of the economic crisis on the shoulders of the working class. These included measures such as cuts in some sectors and the raising of Value Added Tax from 14 to 15 percent. Other measures included amendments to the labour laws, which sought to make it more difficult for unions to go on strike; and the introduction of a minimum wage bill that will entrench millions of workers in extremely low wages.
Big business was overjoyed. They called this period “the new dawn”! After a decade of the disastrous “Zuma years”, they finally managed to get a faithful representative of theirs back into the Union Buildings – and he seemed to be delivering. The financial markets reacted by shooting up to record levels. The rand surged to its highest level against the dollar in three years. Business confidence shot up to an all-time high. We were told that the nightmare of the “Zuma years” would soon be behind us.
Now, seven months later, nothing is left of “Ramaphoria”. The myth of “Ramaphosa the businessman”, who was supposed to lead the economic recovery, has been exposed. The economic reforms have had the opposite effect of what was intended, both economically and politically. On the economic front, all the measures he put in place to “revive” the sluggish economy have instead conspired to plunge the economy back into recession. The rise in VAT and cuts in the public sector spending have sliced into the market and have therefore slashed demand in the economy.
The burden of this crisis is placed on the backs of the working class, with one worker on average having to provide for more than five dependants. Ramaphosa’s plan does absolutely nothing to address this crisis faced by the working class and the poor. It is based on the same failed capitalist policies that caused the crisis in the first place.
On the political front, the counter-reforms have already sparked a backlash from the working class. The attack on the labour law and the minimum wage bill sparked the biggest general strike outside of the tripartite alliance since the 1950s. The government also tried to take on the electricity workers by offering them a zero percent wage increase, swearing high and low that there was no money. This backfired spectacularly, with workers shutting down the power supply to the headquarters of Eskom, the giant state-owned electricity company. Facing the prospect of a general blackout, the government was forced to come back to the negotiations. In the end, the workers achieved a magnificent victory, gaining a three-year wage increment of more than 7 percent for each year! The same process is playing out in the private sector. A good example is Impala Platinum, which warned of cutting 13,000 jobs. AMCU, which won a five-month strike in 2014 in the platinum sector, threatened a year-long strike if the company goes ahead with its plans.
This is only the beginning. All the signs are evident for the return of a massive social explosion. But this time it could be on a higher level than in 2009-2013. The working class is still undefeated and is ready to fight. The pressures on the workers are a ticking time bomb, which sooner or later will explode – with revolutionary consequences. The problem is that the working class does not have a revolutionary leadership that is prepared to go beyond the limits of capitalism, overthrow this system and introduce a socialist, planned economy. This is the burning task facing the working class in South Africa.