Poverty to rise as SA flirts with recession, says report

February 3, 2016, 5:08am

By Ntsakisi Maswanganyi, Business Day Live
Photo: Thinkstock

THE World Bank warned yesterday of poverty growing in SA in a sober assessment that said the economy was flirting with recession.

While emphasising the stagnation and risks posed by a global slowdown, it said the economy would have to expand at least 7.2% from 2018 if SA were to start to reduce poverty as per the National Development Plan (NDP).

"The economy is flirting with stagnation, if not recession," the bank said in its economic update report on SA.

The 7.2% figure is important, because it indicates the yawning gap between current rates of growth and those SA would have to attain to meet its development goals. The government has aimed for 5.4% growth to meet the NDP targets.

"A pick-up of this size would be ambitious to achieve in good times, let alone given the outlook of weaker commodity prices and lower Chinese demand.

"Reigniting growth to begin to close this gap calls for comprehensive reform to encourage new growth drivers to emerge," the bank said, warning that there were still "considerable risks".

The last time the economy expanded anywhere close to that level was in 2006 — at 5.6%.

The bank sees SA growing 0.8% this year from an earlier forecast of 1.4%. The forecast for next year was revised to 1.1% from 1.6%, its South African economic update showed.

A ratings downgrade to junk would escalate SA’s woes.

"A downgrade to subinvestment grade would trigger higher borrowing costs, capital outflows, and risk a recession with knock-on implications for poverty reduction and possibly social stability in the longer term," the bank warned.

The higher borrowing rates and capital outflows would cause further rand depreciation, it added.

The "dramatic deterioration" in the economic growth outlook during the past few months reflected a sharper economic slowdown in China, lower commodity prices, domestic policy uncertainty and the drought, World Bank lead economist for SA, Catriona Purfield said.

The drought could have shaved off 0.2 percentage points from economic growth last year, which the bank estimates at 1.3%, and pushed an estimated 50,000 people into poverty. Most economists and agencies are revising down their growth forecasts and the Treasury is likely to do the same this month when Finance Minister Pravin Gordhan delivers the budget.

Treasury saw the economy growing 1.7% this year, 2.6% next year and 2.8% in 2018. The Reserve Bank last week put growth at 0.9% for the year.

It would take longer for SA to stabilise debt if growth slowed, and that would have "adverse consequences" for investor confidence.

Rising debt levels, a further slowdown in economic growth and a large budget deficit are among reasons credit rating agencies have downgraded SA. These factors also threaten a descent to junk status. "Concerns about the government’s commitment to fiscal targets resurfaced strongly in December amid sudden changes in the minister of finance, flagging fears of the risk of a ratings downgrade to speculative grade sooner rather than later," the bank said.

It estimates that if growth was one percentage point lower than projected by the Treasury by 2018, the gross debt ratio would rise to 49.9% of gross domestic product by the 2018-19 fiscal year. That would be 0.5 percentage points above the current projection.

With monetary and fiscal policy already "constrained, other reforms are needed to lift the long-term growth trajectory", Ms Purfield said.

Improved competition policy was one of the "bold reforms" highlighted. Policies that fast-tracked infrastructure investment, slashed the regulatory burden, enhanced market flexibility and raised education standards had the potential to restore confidence and encourage investment and growth, World Bank country director for SA, Guang Chen, said.

These were the same issues raised by a group of business organisations yesterday. The South African Chamber of Commerce and Industry, the Small Business Project, the Tourism Business Council and the Black Business Council jointly called on the government to apply stricter, more robust regulatory impact assessments before developing policy and regulation.