Western Cape Provincial and Municipal Economic Review 2019/20

Budget (WCPP)

30 September 2019
Chairperson: Ms D Baartman (DA)
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Meeting Summary

The Western Cape Provincial Treasury provided a Provincial and Municipal Economic Review for 2019/20 where socio-economic developments were also unpacked and the implications discussed.

The slow growth of economy and high unemployment were key discussion topics. Members asked about the causes of the increasing income inequality; why the infant mortality rate had increased; about South Africa’s significantly lower growth compared to similar economies in the Sub-Saharan region; the contributory factors for the West Coast’s impressive growth. Members raised concerns about the decline in the agricultural sector as well as job losses in tourism. Education decline and skills outflow in the province was noted as was the general under-skilled population moving to the province.

Members suggested that oil and gas resources that had recently been discovered could contribute to the national economy. The regulation of and communication between the provincial and national fisheries sector were vital and it was suggested that the Western Cape monitor its fisheries GDP contribution to the economy. Measures to avoid load shedding were also raised.
 

Meeting report

Ms TJ Van de Reede, Acting Director of the Western Cape Provincial Treasury, provided the Committee with the GDP growth rates of major developed and developing economies as well as economies in the Sub-Saharan region and South Africa from 2017 to 2020. The significantly lower GDP growth rate of South Africa was emphasised.

The Provincial Treasury provided explanations for the current economic outlook. Globally, ongoing trade disputes between the US and its trading partners threatened global supply chains resulting in systemically lower growth. Global political and geo-political developments such as a “no-deal” Brexit, and continued US sanctions against key oil exporting/producing countries contributed to the gloomy growth.

Within South Africa, business confidence had declined to a 20 year low which potentially impacted on investment inflows. State intervention in support of financial sustainability of state owned entities jeopardised economic performance. Tax revenue underperformance had placed South Africa’s fiscal ratios (debt to GDP, fiscal deficit) under increased scrutiny from rating agencies. The continued slump in economic growth prompted the South African Reserve Bank (SARB) to cut the repo rate in July to boost spending and credit uptake over medium term.

At provincial government level, the Western Cape government faced crime, social unrest and xenophobia; rapid urbanization; volatile and unpredictable weather patterns as well as a skills outflow.

From 2014 to 2018, private services was the biggest contribution to growth. The construction and government sectors also added positive weight to growth. The job growth from 2014 to 2018 was supported by higher employment in all sectors - private services, business services and wholesale and retail responsible for 67% of net jobs. Between 2019 to 2023, it was projected that sector growth outlook would be: Private services: 70%; Manufacturing: 16%; Agriculture: 7%.

In the Western Cape, almost three-quarters of its growth forecast was from private services, business services as well as finance and insurance. Growth within the manufacturing and agricultural sectors was also expected to increase. However, general government and construction sectors were expected to decline in growth.

The key trends for Western Cape in 2018 were noted: Agriculture and agro-processing had 36.1% of exports in 2018. This was the fastest growing export sector in 2018 averaged at 26.9% growth. Strategies to mitigate impact of climate change includes the diversification of agricultural products. There was remarkable growth in blueberry products. In the tourism sector in 2018, the number of jobs declined by 530 jobs (1.4%) while the estimated gross value added (GVA) rose by 3.5%. Within the construction sector in 2018, the industry GVA declined by 1.2% but employment increased by 2.3%.

The Committee was provided with figures for the employment dynamic in the province from 2014 to 2019. The general trend is that the unemployment rate (narrow definition) is much lower in the Western Cape (20.9%) compared to the national rate (25.2%). In 2019, the Western Cape unemployment rate was 19.5% versus the national rate 29.6%.

The Western Cape socio-economic developments were unpacked and analysed. It was estimated that the population of the province was 6.8 million people. The fertility rate had seen a decline over time and the increase was largely driven by in-migration. Inequality has increased (0.61), but the Human Development Index HDI (0.73) continues to increase. For education, there was an overall improvement in test scores across Grades between 2012 and 2018, but the regression in performance in 2017 and 2018 was noted. Western Cape had the third highest National Senior Certificate (NSC) results. Within the province, there was an increase in life expectancy, however, maternal mortality in-facility ratio and mother-to-child transmission of HIV have worsened in the last year. The top three causes of premature mortality in 2016 in the province were interpersonal violence (11.3%); HIV/AIDS (10.9%) and diabetes mellitus (7.6%). The housing demand continued to grow and basic service provision remained under pressure due to rapid population growth. Within the health sector, "tik" is the primary substance of abuse amongst patients admitted to state specialist treatment centres; followed by cannabis and alcohol. There was an increase in murder, attempted murder, sexual assault, but a decline in drug-related crime and driving under the influence of drugs or alcohol.

Mr ML Booysen, Senior Manager: Local Government Budget Office, briefed the Committee on the economic outlook of the Province. The Cape Metro and the five Districts contribution to the Western Cape economy were noted. With the exception of the Metro (at 71.7%), the second and third largest GDP contributions are the Cape Winelands District (11.5%) and the Garden Route District (7.6%). Similarly, the Employment contributions follow the same pattern. However the Metro's share of employment is less than its GDP contribution indicating that the industries in the metro are more capital intensive and less labour intensive compared to the other regions.

The structure of the Western Cape economy and the district contributions per sector were outlined. The finance, insurance, real estate and business services sub-sector makes the largest contribution to the district economy in most districts, except for Central Karoo District where the general government sector is the biggest and in the West Coast District, given it is a more rural region, where the manufacturing and consequently, agriculture sub-sectors make the largest contribution.

In general, growth has been declining across all sectors. All districts experienced tepid growth on average over the past five years, with the highest growth rate in the Overberg District. The performance of the tertiary sectors as well as the agriculture, forestry and fishing sectors had a large influence on overall economic growth. The agriculture, forestry and fishing sector has experienced very volatile growth rates over the past five years and is expected to contract severely in 2018, which will also impact the manufacturing sector.

Finance, insurance, real estate and business services has been the fastest growing sub-sector on average over the past five years across all the districts which could potentially require a demand for highly skilled workers in the future. Most international trade originates from the Cape Metro (which serves as a major port to other provinces as well), then Cape Winelands. West Coast also contributes somewhat to exports. Trade from the Garden Route, Overberg and Central Karoo is limited. The top exports of each district were:
- Cape Metro - Petroleum oils, citrus, grapes and apples
- West Coast - Flat-rolled products of iron or steel
- Cape Winelands - Citrus, grapes and apples
- Overberg - Apples, pears and quinces
- Garden Route - Citrus
- Central Karoo - Dairy products.

The Provincial Treasury explained the implications of the economic outlook. Weak economic growth at a national level was mirrored in the province and across local economies. Low growth, coupled with low investment, low business confidence and fiscal risk from SoE support could risk sovereign credit rating. Low growth negatively impacting national revenue collection, signalling potential reduction in the fiscal framework. Private services sector was driving the regional economy going forward, including positive net job creation. Agriculture, forestry and fishing sector rebound following drought, but unpredictable weather patterns continue to pose a risk to the sector. Unemployment rate was lower than 5 years ago, but there was a substantial growth in the non-job searching unemployed. Focus had to be on creating opportunities for youth and reducing youth unemployment. Low growth has impacted on household incomes  –  increasing inequality. Despite the population growing faster than the economy, HDI levels are improving – government services contribution to overall well being. Access to basic services levels are increasing, but rapid urbanisation is increasing housing demand and exerting pressure on municipal infrastructure and municipalities to deliver basic services. The high incidence of crime continues to erode economic growth and socio-economic development. Improved safety and security are key to improving business confidence, attracting investment and safe communities.

Questions
Ms N Nkondlo (ANC) asked about the cause of the inequality increase. What are the capacity challenges that municipalities face in managing their own finances?

Mr C Dugmore (ANC) remarked on the skills outflow and asked what skills and in which sectors was there an outflow. He asked about the contributory causes for the regression in education outcomes in Western Cape. What factors contributed to the West Coast’s impressive higher than average growth? He asked if strategies had been discussed to address income inequality.

Ms M Wegner (DA) asked why South Africa’s growth outlook was so much lower than other countries in the sub Saharan region.

Provincial Treasury Responses
Mr Booysen said that the reason for the increasing inequality was that job losses had happened at the lower skills level whilst more people had been employed in the tertiary sector which required high level skills. This contributed to higher inequality.

On the specific municipal challenges in rural areas, more people were unemployed in those municipalities, and so these municipalities could not collect sufficient revenue from its people but still had to provide free basic services to them. This would put more pressure on the budget of such municipalities.

The slower growth outlook was a general trend and it was experienced by most emerging economies. Even in the case of China, the economic growth was only half of what it had been ten years ago.

The West Coast’s GDP growth was due to an increase in the agricultural and fisheries sectors after the drought.

The Provincial Treasury database did not have information on the breakdown of which sectors had been most affected by the skills outflow.

Questions
Mr M Sayed (ANC) asked what measures were in place to address the decline in education. He highlighted the importance of the matric pass rate to the country’s economy. He asked for explanations for the increases in income inequality, HDI, life expectancy as well as infant mortality rate.

Mr P Marais (FF+) said that the biggest employment drivers had always been in the agricultural and manufacturing sectors and these factors had not been listed. However, the jobs available currently required at least semi-skilled workers which unskilled people could not perform. On the other hand, immigrant labour coming to the country is largely made up of unskilled labour. He asked for the Provincial Treasury to give an opinion on whether the recently proposed Grade 9 certificate would be feasible under this dynamic.

Mr G Bosman (DA) asked about the 0.1% decline in the agricultural / fishery sector as he was aware that an aquatic programme was currently in place in the region. He asked if the film sector in George had been taken into account. To what extent could the oil and gas sector contribute to GDP in the long term?

Response
Ms Booysen said that the Provincial Treasury could not respond to the specifics on the interventions to address education outcomes but the information was available.

She asked the research team to expand more on the increase of income inequality.

The Garden Route fire had had a negative impact and caused a decline in economic performance there.

Life expectancy and income inequality were measured by different indicators and HDI was used to measure the improvement of life expectancy. The higher unemployment rate widened the gap in income inequality.

Although the matric pass rate had dropped, the performance of the pass rate was improving. This was manifestly clear in the increase in the number of learners that had passed subjects like maths and science.

The increase in the child mortality rate was only a marginal increase. The child mortality rate in  the Western Cape was well below the SDG goal set by the national government.  

Provincial Treasury saw the link between immigration and high unemployment. However, as a result of immigration, there were also positive aspects such as new expanding work opportunities to absorb unskilled labour.

The Knysna fire had definitely impacted on the decline in the forestry sector. The Provincial Treasury reaffirmed that the sector however still contributed significantly to the national economy.

Questions
Mr D America (DA) asked if work had been done to examine the impact of the national minimum wage on future employment.

A Committee Member requested a breakdown of the sectors and food product exports as well as the corresponding export-receiving countries. Which types of business were the beneficiaries of such exports. On  the population increase in the Western Cape, he asked how the Provincial Treasury managed to reconcile the two conflicting views: on the one hand, Home Affairs imposes restrictions to control the influx of foreigners; on the other hand, the country needed to be open to tourism and skills.

Mr D Smith (ANC) commented on the reality of Western Cape’s fishing sector in South Africa.The province is one of three provinces in the country that has a fishery sector that can contribute to the GDP. Hence, he asked if the Provincial Treasury had any percentage figures on the fisheries’ contribution to the GDP. He further asked if there was any communication between the provincial and national fisheries in terms of job creation and revenue generation.

Response
Ms Van de Rheede said that the Provincial Treasury could not expand on the impact of the national minimum wage as no research had been done on the subject yet.

The countries to which it exports were Saudi Arabia, Malaysia, Turkey and United Emirates. The Provincial Treasury did not have details on the beneficiaries of the exports.

The Provincial Treasury could not provide the data on the GDP contribution of fishery sector but it could provide raw data.

The Provincial Treasury reaffirmed its supportive stance in keeping the balance between restriction and promotion of immigration.

Questions
Mr Marais said that his question was not answered. His question was about the uncontrolled inflow of unskilled job seekers to the Western Cape. What effect did this have on the Western Cape economy and on the demand for services and jobs?

Mr Sayed asked what products were exported and which companies were taking part in the production of these products.

Ms Nkondlo asked about the correlation between the water shortage challenge and the jobs decline in the tourism sector. She asked how much of the jobs increase in the construction sector was contributed by the Expanded Public Works Programme (EPWP) programme. She asked how much does the municipality subsidise poor households as well as the percentage of that amount spent due to migration inflows.

The Chairperson asked what was being done to minimise the severe impact of load shedding in future on manufacturing and agriculture. She asked what factors could be attributed to the growth in the mining sector. She echoed Mr Bosman’s question and referred to a recent meeting with Mossel Bay Municipality about a Special Economic Zone, and asked if gas resources had been identified in the George area.

Response
The Provincial Treasury replied about the jobs increase in the construction sector saying that it did not keep records of the employment that was driven by the EPWP programme. However, it was aware of the strategies employed by maintenance which was labour-intensive and the impact of these strategies could result in an employment increase in the sector.

The products that got exported to those countries were fruit and vegetables as it did not need certification to export.

The subsidies of municipalities could be found in their Annual Budget and Annual Reports.

The Provincial Treasury was aware of the job losses in the agricultural sector. Across all districts, the advance of technology replaced human labour and low-skilled jobs were shed. What was in high demand was high-skilled jobs for which Provincial Treasury needed to work on capacitating people. Migration was the inevitable result of urbanisation because people were migrating to bigger urban areas for jobs. Although there was an inflow population across all districts, the loss of agricultural jobs was not caused by this migration. It was caused by the lack of skills and the fire incident. Local residents could not be employed because vacant jobs would require a matric.

On the importance of capacitating the population with skills, the Provincial Treasury was undertaking research studies on skills supply and demand. However, it would not help local communities if the population within an extremely industrialised area were not equipped to take these jobs.

The Provincial Treasury replied that there was an improved growth in the tourism sector. This was due to government policy in promoting tourism.

The Provincial Treasury had been in discussion with the relevant bodies but there had not been any concrete gas resource findings yet. On oil identification, 1 billion barrels was provided by means of an independent estimate. There will be an indirect impact on the community and direct impact on the economy from the revenues generated. Oil accounted for 15% of SA total exports. This would also have an impact on the skills demand in those areas.

On load shedding, the Provincial Treasury was exploring the possibility of a shift towards renewable energy.
Solar panels and generators were provided to these sectors to reduce the impact of load shedding.
This was provided not only for the tourism related sector but also in areas where the manufacturing sector is based.

Mr Marais wondered about the population density of the West Coast to that of the Cape Metro. He asked if the West Coast would benefit from a governance adjustment such as incorporating it into a massive Metro.

The Provincial Treasury answered that currently there was no talk of combining the West Coast into the Metro since the timing was still premature. However, perhaps it would be in the picture within a much longer time frame.

The meeting was adjourned
 

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