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Restarting the SA economy post-COVID-19: A brave new world?

30 April 2020

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by Anchor

“When things do not go your way, remember that every challenge — every adversity — contains within it the seeds of opportunity and growth.”― Roy T. Bennett

The COVID-19 pandemic has led to a near total shutdown of social and economic activity not only in South Africa (SA) but around the world. The IMF’s latest global economic projections show a 3.0% YoY contraction in global GDP growth for 2020 (a bigger downturn than in the 2008–2009 global financial crisis [GFC]), followed by a 5.8% YoY rebound for 2021. China’s growth is projected at 1.2% and 9.2% YoY in 2020 and 2021, respectively. Meanwhile, for Europe, euro area GDP growth is forecast to contract by 7.5% this year and then to rebound by 4.7% in 2021. Similarly, the UK is expected to record a 6.5% YoY growth slump for 2020, followed by a 4.0% YoY rebound in 2021. For the US, which has (along with Italy, Spain, and Portugal) been especially hard hit by the pandemic, GDP is forecast to decline 5.9% this year and then grow by 4.7% in 2021.

Restarting and reinvigorating economies (and life in general) will likely be the defining government challenge of this decade if not century. Appropriate middle ground must be found between a long, broad lockdown that could do untold damage to the economy, especially an already fragile one such as is the case of SA, and a reopening that is too soon and too fast, risking public health and potentially resulting in subsequent lockdowns or high mortality rates. Either way, what lies ahead for world governments is uncharted territory.

According to health experts managing COVID-19 will be a long-term game which means that its impact will most probably be felt for months, or even years, in the future. Most estimates are that a vaccine is at least 12 to 18 months away but reopening businesses cannot wait for a vaccine or for when the virus is eradicated. While life may never be the same for anyone after this pandemic, and many have called the virus a reset of economic principles and norms, which measures should SA take to ensure this brave new world we are entering results in a stronger economy that benefits all the citizens of our beleaguered country?

We asked the Anchor team to come up with innovative solutions which they believe could be practically implemented by government, once the various stages of lockdown have been lifted, in order to buoy the local economy. The ideas we received ranged from unique and easily implemented plans to suggestions that are basic common sense (and which government should have implemented long ago) to more demanding initiatives and programmes that could, if executed correctly, see all citizens benefit from a post-COVID-19 economic reset and resurgence. We highlight that what follows are ideas from a diverse team of individuals across Anchor and these proposals do not necessarily reflect the views of the company. However, we believe that it is important not to censor original ideas but to rather put the proposals out there for our readers to decide. If just some of these suggestions can be actioned, we nonetheless think that SA could grow more rapidly and, more importantly, inclusively, than if the country maintains its current trajectory.

We also separate the proposals we received into those that are aimed at giving the economy a kick-start and those strategies which we believe to be a basic human right and which should have been implemented ages ago. We start by looking at those ideas we received that could see a resurgence of the SA economy if implemented and also discuss the workability, practicality, and disruptive concept of each one.

  • An economic solution and not a political one? SA has to start by giving all its citizens employment opportunities – jobs, jobs, jobs! Once the country is able accomplish that, an employed individual’s access to the economy will, in time, solve a significant number of SA’s political problems. But, how do we create these jobs? One way to do this is by challenging the country’s 247 asset managers and 400 JSE-listed companies to each fund a start-up business by committing: i) A R1mn once-off payment to creating this start-up business; ii) contributing 5% of each asset manager or company CEO’s time to the venture; iii) providing 10% of each asset manager or company ExCo’s time to the start-up; and iv) by contributing 100% of the time of one new company or asset manager’s employee to this new venture. By doing this, 647 start-up businesses can be built, each with its own access to impressive business expertise and R1mn in capital. It is therefore not inconceivable that c. 7,000 jobs can be created immediately (10 jobs for each start-up, plus the 647 new employees). If only half of these start-ups grow and employ double the number of people in year-two, then the number of new jobs created jumps to 11,000. If only half of these business continue growing, the sky is the limit ….
  • GEPF: We see some benefit to useing a portion of the Government Employees Pension Fund (GEPF), which is Africa’s largest pension fund, for local development projects. While the risk of corruption and tender irregularities remain, government can allay these fears by acting decisively against any corruption (which should be done first). GEPF-funded projects could get loans at the flat Johannesburg Interbank Average Rate (JIBAR) rate, which is calculated as the average interest rate at which banks buy and sell money. Preferential funding treatment can also be provided to those development projects that are directed at education, housing, trade, and industry. The key to such a programme would be to ensure that the projects are bankable and well structured. We think that, in many ways, SA suffers more from a lack of properly structured projects than it does from a lack of access to capital.
  • A complete rethink of employment equity (EE): For the SA economy to create employment we have to incentivise the correct behaviour and current EE plans only enrich a handful of individuals (usually politically connected, or in the case of fronting it results in a deliberate circumvention of the Broad-Based Black Economic Empowerment [B-BBEE] Act and codes). We propose a new EE plan with the following characteristics: i) Incentivise businesses to increase their headcount and for every year a business doubles its staff complement, that business is automatically level 1 BEE-compliant for the following financial year; ii) If a business increases its staff by 75%, it automatically becomes a level 2 BEE-contributor; iii) If a business increases its staff by 50%, that business automatically becomes a level 3 BEE-contributor; and iv) Businesses receive a tax incentive whereby the company’s tax falls by the additional amount of PAYE that such a business has generated from its new employees.We highlight that these suggestions are far more small business-friendly, as large companies will likely struggle to accomplish this, which means that it will have the unintended consequence of also breaking up monopolies and making small businesses more viable. In the scenario explained above, for businesses to maintain their BEE level, 80% of new employees must remain at that business and the business owner must grow their business by a headcount of 20% p.a. This requirement will be heavily weighted in terms of points for EE. This has two benefits, i) it increases the tax net of PAYE earners; and ii) it allows large employers (such as mines), to increase their headcount as well rather than being forced to relinquish equity in their businesses i.e. would an investor rather double their workforce or be forced to give away 51% of their business? The tax incentive and guaranteed EE level should result in a rapid increase in employment as business owners gladly expand their operations rather than having to give away equity in their businesses. This system is extremely easy to police through a company’s PAYE payments, and it will quickly become apparent whether individuals listed by a company are in fact real employees or not.
  • Tax relief for small medium and micro enterprises (SMMEs): Government should consider an immediate tax refund to informal SMMEs of 50% of their total 2020 tax, paid back to them to assist with liquidity over the next few months. SMMEs are already reflected as such on the SA Revenue Service’s (SARS) database and a release of funds can be done quickly. In addition, we need to extend the SMME Debt Relief Fund to include sole proprietors. Most sole proprietorships employ other staff members, but currently sole proprietorships are omitted from the fund as they are not formally registered with the Companies and Intellectual Property Commission (CIPC). In addition, we would advise an acceleration of the proposal from February’s Budget regarding a lower tax rate for SMMEs and implement it in the current tax year. Other suggestions include expanding the Office of the Chief Procurement Officer’s (OCPO’s) e-portal to cover all procurements at a national, provincial, and local government level. This will provide SMMEs with greater access to supply government (currently SMMEs only apply for tenders).
  • Limit the paperwork required to register a business: SMMEs are crucial for SA’s economy to boom and, for the quick and easy establishment of SMMEs to work, government must limit the paperwork required to register smaller businesses. We note that this process has started with the registration of a business being significantly simplified through the availability of online applications and registrations.
  • VAT: Cut the VAT rate to 13% on all food and household consumer goods (excluding alcohol and tobacco) for a period of 12 months. Thereafter, VAT moves up to 14% for a further 12-month period. Also cut the VAT rate on all other goods and services by 1% for two years. These interventions should help poverty alleviation in the short term and boost consumer demand thus driving medium-term economic growth. After two years, all VAT rates revert to 15%. The drop in prices should result in a decline in inflation, thereby giving the SARB further scope for interest rate cuts. We estimate that this will cost c. R50bn over a two-year period, but government should be able to recover some of these costs in the form of increased revenue collections.
  • Competitive and open tender processes: Private industry should play an active role in ensuring that competitive and open tender processes are followed by government. Transparency in government tenders is crucial – it will allow the losing bidder to actively interrogate and understand the nature and methodology used to select a winning tender.
  • Manufacturing: SA had a large, burgeoning local clothing and textiles manufacturing industry which was effectively destroyed by cheap imports (especially from China). In conjunction with the private sector, government can get clothing and textiles manufacturers back to work by reinvesting and reviving the industry and, in the process, many jobs can be created. Ironically, a catalyst that might revive SA’s clothing and textiles sector, could be COVID-19. Proudly South African recently launched an online portal where you can buy masks from local manufacturers. As SA enters Level 4 of the lockdown, citizens have been urged to wear masks when venturing outside their homes.
  • Conscription used as a training programme: SA citizens between the ages of 18 to 22, who have never been employed or cannot get a job should enter a one-year conscription training programme, through which people are housed and taught a job and basic life skills. This should be compulsory for all unemployed citizens within the requisite age range. Existing military bases can be used, and soldiers can help run the system. The government decides where the gaps are in terms of the job market and trains people to take advantage of those gaps. At the same time, the programme offers the following practical life skills from which a candidate can select one option: i) Farming, ii) building (construction), iii) computer literacy, iv) manufacturing and v) entrepreneurship (or how to run your own business). SA has a wealth of retired, highly skilled individuals that would want to get involved and teach some of these programmes. The private sector can also volunteer their time and money for the various programmes. In addition, anything that is required to run these programmes must be locally sourced, thereby giving our economy a boost while these programmes run.
  • SOEs: Government should sell-off underperforming SOEs such as SAA, which must be allowed to default on all non-guaranteed debt and collapse into bankruptcy.
  • Land ownership: While this is a controversial topic, in our view, individuals fulfilling certain criteria should be given an active say in the economy through land ownership. Here we are not talking about expropriation without compensation (EWC) but rather the state, which is currently the largest single landowner in the country, providing its citizens with some of the vast swathes of land that are sitting empty and undeveloped. A famous example of this is the City of Cape Town’s (COCT’s) various lease agreements with golf courses across that city. Some of these golf courses are paying rentals as low as R1,000/month for prime property. These leases should be challenged, cancelled and the relevant government property rezoned for housing. Having ownership of their own property will provide people with better opportunities, as they will live closer to the main business hubs in the country, leaving them less exposed to SA’s poor public transport systems.
  • Public transport: Following on from the previous point we note that, currently, SA’s public transport system is completely unfit for purpose. Rail commuters are often late for work as trains are regularly cancelled, overfilled, or delayed by an hour or more. With many employees in, for example, the Western Cape having to commute for over 2 hours/day, this can unfortunately quickly turn an 8-hour workday into a 12-hour plus slog of work and commute. It is crucial that SA supplies housing in decent locations for its citizens, but of even more importance is that this housing not be state-owned. Having a deed of property ownership will enable people: i) to have a stable place to stay and prevent them from paying punitive rentals; and (ii) allow citizens to have an asset against which they can take loans thus enabling them to enter the formal sector of the economy, instead of resorting to predatory lenders who charge harsh interest rates which creates debt-slavery.
  • Public holidays: Cancel all remaining 2020 public holidays (excluding religious holidays such as Christmas).

In the following section, we highlight those ideas provided by members of the Anchor team which might not necessarily result in resurgent economic growth, but which could, if implemented correctly, assist SA during and post-lockdown.

  • Upgrading and maintaining of SA’s water resources: Access to water has been sorely neglected over the past two decades or more, especially in rural areas. In our fight against COVID-19 it has become even more important for every citizen to have access to clean water and thus maintain the requisite cleanliness which fighting this pandemic requires. This means urgently upgrading citizens’ access to water. If this is done as a government/private sector partnership it could result in some much-needed job creation – not only in terms of those direct jobs created but also through ancillary opportunities such as the supply of pipes and other necessary equipment. We increasingly think that a combination of government regulations and private sector capital could unlock massive benefits for SA in this sector.
  • Free online learning: Government should make the new 5G spectrum auction conditional on mobile service providers giving free internet access to the Department of Education’s (DoE’s) website. The DoE website must have the following available for free to all learners and in all official languages: Comprehensive tuition videos, workbooks, past examination papers (covering the majority of subjects at each level), teacher training and resources and a portal to download e-textbooks.
  • Oil: During the Zuma administration and specifically between December 2015 and January 2016, SA’s strategic oil reserves were sold illegally without due process and with a disregard for the necessary approvals. Given current low oil price levels, we think that the SA government should aim to increase its strategic oil reserves to maximum levels, so that future price increases can be cushioned for consumers – a oil hedge.
  • Debt servicing: On a macro scale, SA is far more constrained. The country currently has large debt service figures, which are likely to grow even higher since government debt has repriced in the past three months, with higher yields implying a higher cost of borrowing. The scope for increased government expenditure is limited, and the key is to reduce the items on the current government debt bill. Ramaphosa’s administration has indicated that this will be one of their objectives, with a target to reduce government wages and some other line items going forward.
  • Tourism: COVID-19 has impacted many industries but likely none as hard as the tourism sector. Once lockdown levels have been lifted it is important for all citizens to become a proud SA ambassador and to start promoting tourism opportunities in our country.

COVID-19 has hit global economies hard. However, the major difference in SA is that our country was already in a recession before the pandemic hit and COVID-19’s impact has made our fiscal situation far worse. Nevertheless, while we are loathe to attach anything positive to a pandemic which has killed so many people, we think it is important to acknowledge what our government (and all South Africans) have done right during this difficult period.

In stark contrast to government’s opaque responses during past crises (AIDS denialism, corruption and looting during the Zuma years, EWC, etc.), President Cyril Ramaphosa’s administration seems to have taken the lead in the battle against COVID-19 in a clear and sober manner. The president himself has cut the figure of a consultative, albeit decisive, leader who comes across as being empathetic to the country’s citizens. So far, the early interventions by Ramaphosa’s administration and especially Health Minister Dr Zweli Mkhize’s handling of the crisis should be applauded. There have been missteps, especially from certain members of Ramaphosa’s cabinet, but overall, government’s interventions have been well thought out, especially in light of the fact that we are flying blind in the current situation. SA could have been stuck with a certain first-world president who now presides over a bigger loss of life than during the Vietnam War (at 58,220 deaths).

In an attempt to lessen the impact of the pandemic, Ramaphosa’s administration also unveiled several fiscal interventions to combat the effects of COVID-19, including a R500bn stimulus package to boost SA’s ailing economy and to support those who have been worst affected by the pandemic. The plan follows broad deliberations between government and stakeholders including the National Coronavirus Command Council, the President’s Coordinating Council, and the National Economic Development and Labour Council (Nedlac), amongst others.

In addition, government is assisting companies and workers facing distress through the Unemployment Insurance Fund (UIF) and  special programmes from the Industrial Development Corporation (IDC). Funds are also available to assist SMMEs under stress, mainly in the tourism and hospitality sectors, and small-scale farmers operating in the poultry, livestock, and vegetables sectors. In collaboration with the private sector, allocations are being made to a Solidarity Fund to help combat the spread of the virus. SARS is accelerating reimbursements and tax credits, allowing SMMEs to defer certain tax liabilities, and it has also issued a list of essential goods for a full rebate of customs duty and import VAT exemptions. Ramaphosa’s cabinet will each take a 33% three-month salary cut and some members of opposition parties and high-level corporate executives have also undertaken to take salary cuts, while many corporates have contributed to the Solidarity Fund.

What is comforting is that it appears that, for the first time since ex-President Nelson Mandela tenure, SA as a nation seem to be bonded by a sense of “Ubuntu”, as citizens come together to fight the scourge and support those less-fortunate. It is likely the first time in the history of our young democracy that government, the various political parties, labour and the private sector are all working together – instead of the usual fighting and insults, relevant stakeholders are consulting and attempting to reach agreement around what is best for the country.

The president’s standing in SA and in the organisation which he leads (the ANC), also seems to have been given a new lease on life by his handling of the COVID-19 crisis and current popularity among the electorate. The so-called “fight-back” from the radical economic transformation (RET) grouping of the ANC has, at least for now, taken a back seat. To a large degree, COVID-19 has given Ramaphosa and his Finance Minister Tito Mboweni the opportunity to implement certain reforms which they may not have been able to push through under normal circumstances.

Ramaphosa’s economic recovery plan, which forms part of government’s response to COVID-19 has found favour with many business and political leaders and is seen by many commentators as an opportunity to fundamentally change the economy, thereby creating greater equality by speeding up government spending on service delivery, while at the same time trying to keep businesses from sinking. Restarting the SA economy will require reflection on what the state, businesses and individuals can do and from what we have witnessed thus far in times of crisis or adversity, South Africans always seem to come together to fight a common enemy.

We thank Ferdi Schenck, Heidi van Zyll, Thomas Hendricks, Nicola McMurtry, Dale Franklin, and Karen Harilal for their contributions to this report.

 

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