Business / Business News

Antoinette Slabbert
4 minute read
3 Feb 2016
12:57 pm

World Bank revises SA growth down sharply

Antoinette Slabbert

Budget and competition policy are now seen as being crucial for the future.

PHOTO: AFP

The World Bank on Tuesday announced a downward revision of South Africa’s 2016 GDP growth projection to 0.8%. It is the lowest growth rate since 2009 and sharply down from its previous forecast of 1.4%.

The forecast for 2017 was cut from 1.6% tot 1.1%.

World Bank programme leader Catriona Purfield, said that while the institution was not forecasting a recession; there was a recession risk that should be mitigated by fundamental economic reforms.

At a media briefing in Pretoria on the release of the World Bank’s latest economic update for South Africa, Purfield said the lower growth forecast was based on international factors like a sharper-than-expected downturn of the Chinese economy, weaker commodity prices, and rising US interest rates. Domestic factors like policy uncertainty, infrastructure gaps and the severe drought added to the country’s economic woes.

Purfield said this means that poverty is set to rise in South Africa as incomes fall, making the achievement of eradication of poverty, reduction of joblessness and doubling of incomes by 2030 – as envisaged in the National Development Plan (NDP) – difficult to achieve.

She said the removal of former finance minister Nhlanhla Nene in December had created massive policy uncertainty. She said investors relied on the strength of South African institutions underpinning macro stability – they were shocked by the move and it’s difficult to regain the lost trust.

While equity markets have recovered after the appointment of Pravin Gordhan in the position, bond yields have not been restored to the levels before the event as uncertainty continues.

In this regard, all eyes will be on Gordhan’s budget speech that will be delivered on February 24, Purfield said.

She said the drought shaved 0.2% off year-on-year headline growth in the first three quarters of last year and agricultural exports dropped sharply by 17% in the first ten months of 2015.

It pushed about 50 000 people into poverty: the impact focused on rural areas and Mpumalanga being especially affected.

The impact of the drought will also be seen this year, Purfield said.

Apart from fiscal discipline, South Africa has to embark on fundamental reforms to stimulate growth, she said.

These include improving infrastructure, especially with regard to power and ports, cutting red tape and regulations, improving skills and education and reforming competition policy.

The World Bank found that reducing regulatory restrictions on professional services would boost industries relying on these services by $1.4 billion to $1.6 billion and boost growth by 0.5%.

The economic update focussed on the possibility of stimulating economic growth by increasing competition. Purfield said that could be done by breaking up cartels, which may decrease the cost of critical industry inputs like cement, or decrease the cost of basic items like food for the consumer.

“This is the equivalent to an additional 0.4 to 0.5 percentage points of GDP growth and shows the potential of such reforms to stimulate faster sustainable growth and improved competitiveness at little expense to the State budget,” Purfield said.

She said after the cement cartel was busted, the industry saw the entry of the first new producer in 80 years. Apart from the investment and job creation, cement prices are estimated to have dropped by 7.5 to 9.7% once the cartel was broken. Cement makes up 2% of all inputs in the construction industry and lowering that cost will have a stimulating effect, she said.

Improved competition in the telecommunications sector is dependent on the broader regulatory environment beyond competition enforcement, Purfield said. Telecoms accounts for 2.6% of all inputs and 1.7% of exports. At the moment cost levels are high, with South Africa being the fourth most expensive of 17 African countries for a basket of 1GB.

Purfield said competitive bidding and efficient spectrum assignment policies could alleviate the difficulties for new entrants and capacity constraints of existing operators, contributing to slow broadband speeds and slow deployment of high-speed services.

Purfield said South African competition authorities (the Competition Commission and Competition Tribunal) have been fairly successful in their 15 years of existence. They have broken up 76 cartels, excluding the 17 construction cartels. “In the case of four cartels in maize, wheat, poultry and pharmaceutical products – products which make up 15.6% of the consumption basket of the population’s poorest 10% – it helped generate a 0.4 percentage point reduction in the overall national poverty rate.

“This shows how competition policy can help stretch the cash transfers to the poor from the budget,” Purfield said.

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