South Africa's response to the global economic crisis: briefing by Business Unity South Africa

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Finance Standing Committee

14 February 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Deputy Chief Executive Officer of Business Unity South Africa presented a submission on the economic and business perspective for 2012, with particular reference to the forthcoming national budget.

The submission was given in the context of the 2011 budget, the Medium Term Budget Policy Statement and the 2012 State of the Nation Address.  An overview of the global and domestic economic outlook indicated that the prospects for lower growth rates and increased risk would prevail.  The South African Reserve Bank had revised its growth forecast downward from 3% to 2.8%.  Consumer inflation was expected to exceed 6% and the manufacturing sector was under pressure.  The adverse economic conditions could impact negatively on business confidence.  The strength and volatility of the South African Rand impacted negatively on the country’s competitiveness but the relatively high interest rate had attracted an influx of foreign capital.  South Africa’s competitiveness could be improved by removing the obstacles caused by over-regulation and by encouraging the development of small business enterprises.  South Africa’s fiscal space was shrinking but the country had room to manoeuvre in applying monetary and fiscal policies to boost the economy.

The important issues that the business sector would like to see addressed in the 2012/13 budget included debt sustainability, containing the public sector wage bill, balancing welfare expenditure to the limited tax base, avoiding tax shocks, strengthening implementation and delivery, promotion of public/private partnerships, administered prices (particularly the price of electricity), sound provincial fiscal management, the implementation of the youth wage subsidy, encouraging small businesses, anti-corruption actions and re-affirmation of government’s commitment to policy certainty.

Members asked questions about financing the infrastructure projects announced in the 2012 State of the Nation Address and the resultant increase in the deficit; the role played by the private sector in assisting government to implement policies and address challenges; the need for a guaranteed power supply and the role of the National Energy Regulator of South Africa in determining electricity prices; the lessons learnt from the Eurozone crisis in respect of the development of a Southern African monetary union; alternative sources of revenue for new energy and transport infrastructure; the involvement of the Committee in monitoring the implementation of infrastructure projects; the difference between the 2008 global financial crisis and the 2011 sovereign debt crisis; the implementation of the four accords signed by the private sector; promoting the establishment of small business enterprises and addressing the existing wage disparities.

Meeting report

Briefing by Business Unity South Africa (BUSA)
Professor Raymond Parsons, Deputy Chief Executive Officer, BUSA presented a submission to the Committee on the economic and business perspective for 2012, with special reference to the forthcoming national budget (see attached document).

The points of departure of the submission were the 2011 Budget Speech by the Minister of Finance, the Medium Term Budget Policy Statement (MTBPS) and the President’s State of the Nation Address (SONA).  Since the MTBPS, the local economic outlook was characterised by a deteriorating global economic outlook and a downward revision of the 2012 growth forecasts for the country.

The global and regional economy was characterised by lower growth and increased risk and was expected to remain in negative territory for the foreseeable future.  The nature of the economic crisis had changed from a banking/financial crisis in 2008 to a sovereign debt crisis in 2011.  The Eurozone was at the epicentre of the sovereign debt crisis and the following three months would be crucial for the Eurozone economy.

Domestically, South Africa was expected to lag behind other developing economies in 2012. The South African Reserve Bank (SARB) had revised its growth forecast downward from 3% to 2.8%. The BUSA forecast was 2.7%. The dampening of global growth and demand was a key driver for the downward growth forecast. The number of new jobs created in the formal sector was estimated at 200,000, which fell well short of New Growth Path (NGP) and National Development Plan (NDP) targets. Consumer inflation was expected to be 6.1%. The main drivers for the high inflation rate were escalating food prices and administered prices (particularly electricity). The interest rate of 5.5% was the lowest in 38 years. The manufacturing sector was under pressure and the Producer Price Index (PPI) was expected to decline.  The negative global and local economic conditions could impact on business and investor confidence.  Corporate balance sheets remained strong and there was positive earnings growth potential in several sectors.

The strength and volatility of the South African Rand was hampering exports and BUSA supported the steps taken by SARB to promote a more stable and competitive currency.  High interest rates had resulted in an influx of foreign capital but the International Monetary Fund (IMF) considered the country’s reserves to be below the adequacy range.

South Africa’s competitiveness had declined and especially small businesses suffered from over-regulation and red tape.  BUSA recommended that there should be more emphasis on lightening the administrative burden and cost of doing business on small, medium and micro enterprises (SMME’s), which played a significant role in job creation and innovation.

A study by The Economist of the capacity of emerging countries to utilise monetary and fiscal policies to support their economies indicated that South Africa had some room to manoeuvre although the country’s fiscal space was shrinking.  Counter-cyclical policies needed to be in place but the focus should be on developing the structural factors that would strengthen economic performance and enlarge the tax base.

BUSA anticipated that the Minister of Finance’s 2012 budget speech would follow on the 2011 budget, MTBPS and 2012 SONA.  Further clarity on balancing the competing demands of infrastructure spending, welfare payments and reducing the cost of doing business in South Africa was required.  The principles of counter-cyclical fiscal policies, debt sustainability and inter-generational equity were supported by business.

Important issues to be addressed in the national budget included debt sustainability; containing the public sector wage bill and balancing welfare spend against a limited tax base. Tax shocks had to be avoided and updates on carbon tax and funding for the National Health insurance (NHI) programme were required. South Africa had relatively few public/private partnerships (PPP’s), which played a significant role in assisting government to implement infrastructure programmes. Business welcomed the promotion of PPP’s by the National Treasury’s Public/Private Sector Unit.  Administered price increases (for example port charges, ESKOM and water tariffs) should be subjected to better advance planning. Youth unemployment was a major issue and business welcomed the implementation of the youth wage subsidy on 1 April 2012. BUSA suggested that targets were set for the creation of new enterprises. An update on the National Treasury investigation into procurement policies was required.  The budget speech should reflect the principles of credibility, consistency, predictability and relevance to fiscal policy.

In conclusion, Prof Parsons summarised the salient points concerning the global and local economies.  South Africa’s economic and business outlook for 2012 was positive but modest.  He stressed the need for South Africa to increase its growth rate in addition to stabilising the economy and to speed up delivery during 2012.

Discussion
The Chairperson thanked BUSA for the submission, which was delivered timeously in view of the upcoming 2012 Budget Speech by the Minister of Finance.  The briefing had clarified the expectations of the business sector in the light of the current global and domestic economic environment and would assist the Committee in its deliberations on the 2012 budget.

Mr N Koornhof (COPE) referred to The Economist’s “wiggle room” analysis, which raised the question of how the country would finance the major infrastructure projects announced by the President in the 2012 SONA. He shared the concern of BUSA over the extent of the State wage bill. He observed that the number of strikes and lost man-hours during 2011 had exceeded the industrial action taken during the height of the rolling mass action of the Apartheid era. The National Treasury had demonstrated its fiscal credibility but the Minister had stated that more support from the private sector was required as government could not achieve its fiscal objectives on its own.

Ms Z Dlamini-Dubazana (ANC) asked what the commitment was of the private sector towards assisting government to achieve its objectives.  She asked what market forces contributed towards the national growth path.  She asked what the impact of legislation and regulations had been on promoting equity in economic development.  The ruling party was concerned about the lack of support from the private sector in developing the small business and micro-enterprise sector.

Mr D Ross (DA) asked for comment on the issue of infrastructure-led growth versus debt sustainability. Currently, the deficit was 37% of GDP but would increase to 41% if an additional amount of R72 billion for the infrastructure programme announced in the SONA was added. He wondered if a more cautious approach to increasing the country’s debt level was appropriate. He asked if the shrinking of the fiscal base would be counteracted by the economic spin-offs and the increased number of jobs created by the infrastructure programme.  Ideally, the country’s growth rate should be in excess of 5% but a major constraint was the limited power supply and the backlog in electrifying homes and small business premises. The recent large increases in the price of electricity had had a severe negative impact on small businesses and on the poorer sectors of the population.  In terms of current legislation, the National Energy Regulator of South Africa (NERSA) was required to take the cost of new energy infrastructure and depreciation into account when determining the electricity price. However, the effect was to inflate the price. The President’s request to ESKOM to reconsider the increase in the price of electricity was welcomed but he felt that should have been the function of the regulator. Parliament needed to review the powers of the regulator.

Mr D van Rooyen (ANC) said that the concept of forming a Southern African monetary union was under discussion and he asked what lessons could be learnt from the Eurozone crisis.  He pointed out that the cost of electricity in South Africa had been low compared to other countries and the increase in tariffs had come off a very low base.  Load shedding by ESKOM was caused by a lack of maintenance of the aging infrastructure. It was necessary to find alternative sources of revenue to provide new energy infrastructure rather than increasing debt levels. A similar challenge was the need to find alternative sources of revenue to finance the expansion and maintenance of the road network, as highlighted by the protests in Gauteng and the Western Cape against the proposed toll system. The balancing of tariffs against the infrastructure requirement was a complex matter. He asked if government initiatives to grow the economy and to promote infrastructure development went far enough.

Prof Parsons explained that his responses needed to be considered in the light of the complex challenges currently faced by the global and domestic economies. The business sector was looking for balance in fiscal decision-making. There were competing demands in the budget and he suggested that the 2012 budget was analysed in the context of the 2011 budget and the MTBPS.  South Africa had been fortunate in having good Ministers of Finance in recent years and the budget needed to be based on solid long-term planning. The current economic outlook impacted on the nature of fiscal expenditure. Increased spending on the public sector wage bill was consumption expenditure, which would not be supported by the local and international business community.  On the other hand, investment expenditure would be supported. The budget needed to strike a balance and the credibility of the country’s fiscal strategy should not be jeopardised by undue demands on the fiscus.

In response to the questions about the role of the private sector, Prof Parsons said that the private sector was included in the implementation of the New Growth Path and the National Development Plan. To date, four accords had been signed by the private sector with organised labour and the government, i.e. the accords on local procurement, skills development, education and the green economy. In signing the accords, the private sector undertook voluntary commitments to operate differently. The accords were tangible efforts by the private sector to implement government policies.  The next phase was the actual implementation and the signing of accords on small business and enterprise development.

Prof Parsons said that the deficit target for the country was 40% of GDP.  It was important that the increase in the deficit was for the right reasons. Additional investment expenditure would result in positive economic returns and broaden the tax base, which was desirable and which would be supported by the business community. The fiscal space should be controlled in this manner and it would be necessary to make some tough choices. The budget was a political as well as an economic exercise and was a collective responsibility of government, not only of the Minister of Finance. The BUSA submission included a list of the issues that needed to be taken into consideration when considering the budget.

With regard to the issue of administered prices, Prof Parsons said that the matter required careful consideration.  In the 2012 SONA, the President had requested ESKOM to review electricity prices but the role of NERSA in the issue should not be excluded.  The next 25% increase in the price of electricity was due on 1 April 2012, followed by the NERSA hearings on the subsequent cycle of price increases.  Business accepted that the historical cost of electricity had been low but the sudden large increases had been a shock to the economy.  It was necessary to review the pricing model, to link price increases to a long term plan and to have more competition in the supply of electricity.  The new power stations would eventually increase the available supply but the current difficult phase needed to be properly managed in the interim.

Prof Parsons said that the financing of new infrastructure programmes had not been properly thought through.  It was necessary to verify the actual amounts against the MTBPS. There were only two ways in which to finance infrastructure projects, i.e. user charges and taxes. Consideration needed to be given to what was the optimum mix of sources of revenue and what the country could afford. The principle of road tolling was accepted but the problem with the new tolls was that hardly any consultation had taken place before the roads were upgraded and the toll system was introduced. The issue of financing the new infrastructure only arose when the upgrading was completed. Historically, large sectors of the population had no choice about where they lived and the positioning of tolls in urban areas needed to be reconsidered and alternative financing options had to be found. Previously, the fuel levy was ring-fenced but the National Treasury was opposed to this option. Further discussion on a more viable way to finance new road infrastructure was required.

Prof Parsons agreed that the structural issues were not new. The need to address the challenges was more acute in the light of the current global economic outlook. It was not a matter of a lack of money, rather a matter of ensuring that better value for money was achieved. The matter needed to be given high priority and implementation needed to take place without delay. He suggested that timelines for the implementation of the initiatives outlined in the SONA were issued.

With regard to the lessons learnt from the crises in the Eurozone and the global economy, Prof Parsons said that it was clear that a country was in a better position to deal with the challenges if it had good fiscal leadership and a good track record in fiscal management. This was the reason why South Africa was in a position to implement counter-cyclical fiscal policies without running out of money.  If Greece had Ministers of Finance of the calibre of Trevor Manuel and Pravin Gordhan fifteen years ago, the country would not have taken unsustainable fiscal decisions and would not have been in trouble.  The crisis in Europe was a sovereign debt crisis, which was a result of the bad financial management and fiscal policies of the governments concerned.

Prof Parsons was of the opinion that a common currency was desirable. There were a number of regional trade initiatives in the Southern African region but it was essential that all the structural elements were in place before a common currency or monetary union was introduced. The introduction of the Euro was based on political rather than economic considerations. The necessary economic structures were not in place when the single currency was introduced. It was not viable to have a single central bank and 27 Ministers of Finance that each followed different policies. For a monetary union to function effectively, it was essential that all partners followed the same rules. He recommended that South Africa continued with developing a Southern African economic zone but that the implementation of a single currency was deferred until the necessary structures were in place.

Mr Ross remarked that current consumers were paying for future consumption with regard to administrated prices. It was necessary to explore alternative sources of funding. Nuclear energy facilities were expensive and took a long time to construct but once operational, consumers benefited from lower prices.

Prof Parsons replied that the Minister of Finance had referred to inter-generational equity and that it was necessary to strike a balance between current and future demand.  Sufficient long-term planning had not taken place and it was imperative that the present opportunities to debate the issues were exploited and that reasonably quick decisions on implementation were made.  Investors looked for certainty and it was necessary to build investor confidence by having a shared long-term vision in place.  The public and private sectors had a collective responsibility for the implementation of the vision and he believed that sufficient consensus could be reached between stakeholders.

Ms Dlamini-Dubazana referred to the five major infrastructure projects announced in the 2012 SONA.  She asked if the advice to the Committee included reviewing the current procurement policy and if it was necessary to have regulations in place that would enable the Committee to monitor the implementation of these projects.

Prof Parsons replied that the President had said that he wanted to hold a summit of social partners, potential investors and the Presidential Commission on Infrastructure. Such a summit was important as government needed buy-in from investors. BUSA recommended that the establishment of more PPP’s was encouraged. He agreed that the Committee had a role to play in monitoring implementation and that the necessary budgetary provision had been made.

The Chairperson appreciated the information that had been provided in the submission and said that further interaction with the committee would be necessary. He was interested to hear that a distinction had been drawn between the financial crisis of 2008 and the current sovereign debt crisis.  He understood that the earlier financial crisis had originated as a result of consumer-driven demand for credit in the United States of America, whilst the sovereign debt crisis that arose in 2011 involved European countries.  He asked for further comment on the evolution of the global economic crises.

The Chairperson noted that four accords had recently been signed by the private sector but not yet fully implemented.  He agreed that the forthcoming accords on small business and enterprise development would be critical for increasing the growth rate. The IMF had identified that small businesses were most effective in job creation. On average, each small business created ten new jobs.  The national target was to create 500,000 new jobs per annum but 60,000 new enterprises could create 600,000 new jobs. He was not sure to what extent the country had benefited from the job fund established during the Mandela presidency. The President had stated that it was not the role of government to resolve labour disparities and that the issue needed to be resolved between the labour and business sectors.  The President had raised the issue of excessive salaries and he wondered how this issue could be resolved.  He was not sure that the economic crises in Greece and the Eurozone were entirely attributable to political decisions that could not be translated into sound economic policies.

Prof Parsons explained the difference between the financial crisis of 2008 and the sovereign debt crisis of 2011. The 2008 financial crisis had originated in the USA and had a global impact, from which economies had started to recover when the 2011 sovereign debt crisis in the Eurozone occurred.  The USA was unable to control the deficit and had followed Keynesian policies in addressing the challenge. The United Kingdom chose to follow the austerity route in dealing with the financial crises. The merits of the different types of responses were a matter for further debate.

BUSA recommended that national targets were set for creating a certain number of new enterprises in addition to the target for the number of new jobs. Government needed to consider to what extent the creation of small businesses was hindered or encouraged by the legislative and regulatory framework.  Prof Parsons agreed that the best potential for creating a large number of new jobs existed in the small business sector. Government needed to create a climate that encouraged entrepreneurship, for example by raising the current R2 million tax-threshold applicable to small businesses.  The New Growth Path made provision for two-monthly leadership meetings to be held to monitor the progress made in implementing the plan. The role of BUSA was to communicate with the business sector and to liaise with government. Buy-in by the business sector was on a voluntary basis. Government needed to build confidence at the business sector level, rather than at the BUSA level.

Regarding the efficacy of job creation funds, Prof Parsons suggested that the Committee queried the number of applications that had been received and the amount of funding that had been allocated during its deliberations on the budget. The business sector had found the current process to access funding to be difficult. The Committee could assist by exploring ways by which the process could be speeded up and by assessing the effectiveness of the scheme.

The Chairperson thanked BUSA for the information provided in the submission, which assisted the Committee in advising government on the policies that needed to be put in place. The looked forward to further interaction with BUSA once the 2012 budget had been presented.

The meeting was adjourned.


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