No commodity boom lasts forever – structural reforms required

South Africa requires creative and innovative solutions to put the economy back on a sustainable financial path. Structural reforms are needed to enable a more business-friendly environment aimed at encouraging investment in order to grow the economy.

The country has benefited in recent months from a commodities boom which provided an unexpected tax windfall.

This has resulted in an unprecedented trade surplus – meaning that more capital has flowed into the country than out of it – helped to underpin the rand, contained inflation and kept interest rates at historically low rates. The state’s finances have benefitted from the mining sector’s stellar results through improved tax collections which has, in turn, increased calls for a universal basic income grant.

No commodity boom lasts forever. What happens when the price of commodities inevitably cool, and the state’s finances are no longer able to benefit from better than expected tax collections? Any commitment to a universal basic income grant must be based on sustainable sources of revenue. 

All indications are that the recent economic tailwinds are not enough to alleviate the tenuous position of the country’s debt to GDP ratio or avoid further future ratings downgrades unless government is able to significantly reign in public sector expenditure.

South Africa’s economy was in trouble even prior to the Covid-19 pandemic, characterised by low levels of growth, growing unemployment and poor business confidence. The pandemic has exacerbated the challenges facing the country.

A deteriorating debt position is a risk to the entire economy. A financial crisis and deep recession will ultimately diminish confidence and reduce investment appetite.

The fragile state of the economy is reflected in the disappointing month-on-month manufacturing output figures. According to Statistics South Africa manufacturing production fell by 0.7% for the third consecutive month in June this year, indicating that a recovery in this sector has stalled and failed to reach pre-Covid levels. Expectations are that the July figures will be even worse which will weigh on the sector’s contribution to GDP. In line with this, the latest Absa Purchasing Manager’s Index has fallen to a 14-month low representing declining sentiment.

There is extensive research available showing a strong correlation between economic growth and social stability. The former must urgently be prioritised with quick wins from low hanging fruit. These include the introduction of a business friendly regulatory environment which is aimed at restoring private sector confidence and encouraging investment into local operations.

Labour laws need to be amended so that they don’t dissuade businesses from hiring staff. We need to increase the beneficiation of extracted minerals into higher-value products and urgently increase the country’s manufacturing output. At the same time our country’s youth need to be armed with the necessary skills to ensure their employability in a rapidly approaching Industry 4.0 world.

South Africa requires creative but practical policies which enable inclusive economic growth, boost confidence and encourage investment. The country has the potential to create a more positive future for itself, fuelled by opportunities for greater levels of trade as a result of the African Continental Free Trade Agreement. The time is now ripe for meaningful reform.

By Raymond Obermeyer, Managing Director at SEW-EURODRIVE South Africa