Coffee Table Economics with Anchor

Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.

Executive summary

In this week’s edition, we highlight the following:

  • It is a tough road to job creation in a sluggish economy: In the South African (SA) economy, material job creation has only occurred when gross domestic product (GDP) growth approaches 3% p.a. Currently, businesses remain under significant pressure from the ongoing effects of loadshedding and various other structural economic issues which unsurprisingly weigh on jobs and the unemployment data.
  • National Treasury (NT) continues to toe an increasingly thin line in the 2024 Budget. This year’s budget was tabled amid an even more challenging economic and socio-political environment than previous iterations, given the upcoming National and Provincial Elections, the decades of policy inertia and the years of state capture that preceded it. As expected, the 2024 budget did not introduce any new, significant populist policies or spending measures before the elections. Instead, NT continues to toe the line between fiscal continuity, consolidation, and declining revenues amid an increasingly stagnant local economy. 
  • Much ado about the Gold and Foreign Exchange Contingency Reserve Account (GFECRA)? Through the tabling of the 2024 Budget, much ado has been raised around the utilisation of the GFECRA by market participants and commentators alike. Often eyed by certain political factions in their desire to nationalise the SA Reserve Bank (SARB), GFECRA forms a significant component of SA’s reserves management framework and safeguards against potential financial crises and external economic shocks. As such, the careful management of GFECRA is imperative.

It is a tough road to job creation in a sluggish economy

SA faces a significant unemployment problem that continues to pose challenges for the country’s economic and social development. The unemployment rate has remained stubbornly high for many years, with a complex range of factors contributing to the issue. A combination of structural deficiencies, such as a lack of skills, limited access to quality education and training, and inadequate job creation, has resulted in a large portion of the population being unable to find gainful employment. According to the latest Quarterly Labour Force Survey (QLFS) data from Stats SA, SA’s official unemployment rate increased to 32.1% in 4Q23 from 31.9% in 3Q23. Interestingly, both the absorption rate and the labour force participation rate decreased by 0.2 of a percentage point to 40.8% and 60.0%, respectively – indicative of the growing pessimism amongst SA’s workforce. The unemployment rate, according to the expanded definition (which includes those discouraged from seeking work and thus more reflective of the actual number of unemployed South Africans), continues to sit at 41.1% – concerningly high. This points to longer-term, structural issues within the local economy as it is difficult to reincorporate and entice discouraged work seekers back into the labour force. Of further concern is the long-term unemployment rate (i.e., those unemployed for a year or longer), which has steadily increased over the past decade – from 65.5% in 1Q13 to 77.1% in 4Q23. Moreover, SA’s unemployment problem remains particularly acute among the youth, where high levels of unemployment hinder their prospects and exacerbate social inequalities. As such, the youth unemployment rate has risen again to 59.4%.

This latest increase in unemployment does not come as much of a surprise, as the apparent strength in employment growth witnessed during 2Q23 and 3Q23 was never reflected in the consumer spending data. Real household consumption spending shrunk for two consecutive quarters in 2Q23 and 3Q23. High-frequency data from 4Q23 also suggest that consumer demand remained muted in the final quarter of last year. Overall, employment data from the QLFS survey (a household-based survey of labour market dynamics covering the formal, informal, and agricultural sectors) in recent months has diverged sharply from data reported in the Quarterly Employment Statistics (QES), an enterprise-based labour market survey that only reports on the formal sector – thus gaining a more transparent, more holistic picture of unemployment in SA is becoming increasingly difficult.

Regardless of the exact data, we maintain that the official headline unemployment numbers do not fully reflect the true extent of the unemployment crisis in the country. How unemployment is measured tends to overlook specific segments of the population, such as discouraged workers who have given up searching for jobs and are, therefore, not considered part of the active labour force. Additionally, the official statistics do not adequately capture informal and underemployed workers. Furthermore, the official unemployment rate might not fully account for the quality of jobs available or the degree of job security. Many individuals in SA are trapped in low-skilled and precarious employment, leading to underemployment and persistent poverty.

The bottom line

In the local economy, material job creation has only occurred when GDP growth approaches 3% p.a. Currently, businesses remain under significant pressure from the ongoing effects of loadshedding and various other structural economic issues, which unsurprisingly weigh on jobs and the unemployment data. Simply put, the economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans. At the end of the day, SA’s unemployment problem is a complex and multifaceted issue that requires sustained and coordinated efforts from all sectors of society to create inclusive and sustainable employment opportunities for all South Africans.

National Treasury continues to toe an increasingly thin line in the 2024 Budget

SA NT’s 2024/2025 Budget was tabled in Parliament on 21 February by the Minister of Finance Enoch Godongwana. This year’s budget was tabled amid an even more challenging economic and socio-political environment than previous iterations, given the upcoming national elections, the decades of policy inertia and years of state capture that preceded it. As expected, the 2024 budget did not introduce any new, significant populist policies or spending measures before the elections. Instead, NT continues to toe the line between fiscal continuity, consolidation, and declining revenues amid an increasingly stagnant local economy. 

Notably, to help mitigate SA’s growing debt burden, NT has decided to reduce its borrowings over the medium term by using a portion of valuation gains in the GFECRA held at the SARB. As such, the government will receive R150bn in distributions from the SARB over three fiscal years – which will, in turn, help reduce debt-service costs. As a result, this will reduce domestic market financing requirements and the growth of debt stock and debt-service costs. While utilising these funds is not against global best practice per se, it naturally raises some concerns. Ifmanaged prudently and spent wisely, these funds can make a meaningful contribution to alleviating some pressure on the SA fiscus. It does not form a long-term solution to the structural ailments facing the SA economy but merely buys SA some time to generate faster economic growth. Although government debt is now expected to stabilise at 75.3% of GDP in 2025/2026 (lower than the 77.7% projected in the 2023 Medium-Term Budget Policy Statement [MTBPS]), essentially thanks to the use of GFECRA in 2023/2024 for the first time since 2000/2001, debt‐service costs absorb more than ZAc20 of every rand collected in revenue. Moreover, debt-service costs now absorb more of the budget than basic education, social protection, or health. The SA’s government gross loan debt‐to‐GDP trajectory is about 16% higher than the median emerging market (EM) level. Reducing debt‐service costs remains critical for SA’s growth and development.

Matching expectations, gross tax revenue for 2023/2024 was R56.1bn, which was lower than estimated in the 2023 Budget due to a decline in corporate profits and revenue from taxes on mining – reflective of the current economic status quo in SA. In an attempt to alleviate these fiscal pressures, NT has proposed some tax reforms to be implemented this year. In the short-term, personal income tax brackets are unchanged for 2024/2025 (i.e., not adjusted for inflation), along with above-inflation adjustments to some excise tax rates and medical tax credits not being raised for inflation. These are collectively expected to add R15bn in revenue for the fiscus. In the longer term, two notable tax reforms are the two-pot retirement system and the new minimum corporate tax rate. The two-pot retirement system will be implemented on 1 September 2024, with an estimated R5bn likely to be raised in 2024/2025 from the tax collected when retirement fund members access once-off withdrawals. The new global minimum corporate tax will be implemented on multinational corporations with annual revenue exceeding EUR750mn. It will be subject to an effective tax rate of at least 15% regardless of where their profits are located. This tax also aims to limit the adverse effects of tax competition. It is expected to raise an additional R8bn in corporate tax revenue in 2026/2027. While these tax reforms align with international standards, in general, SA’s tax policy is skewed towards the more aggressive side of the scale, which raises questions about longer-term imbalances in the economy.

The bottom line

Overall, the risks to SA’s fiscal position are largely unchanged since the 2023 MTBPS. Weak economic growth continues to slow revenue growth and widen the budget deficit. The risks around higher borrowing costs, unaffordable wage increases in the second year of the Medium Term Expenditure Framework (MTEF) period and further deterioration in the balance sheet of major public‐sector institutions (resulting in bailout demands) remain as prevalent as ever. Nonetheless, the 2024 Budget has turned out to be a reasonably neutral affair followed by a somewhat positive market reaction. Overall, the primary fiscal intent is unchanged, and the fiscal prognosis has turned out marginally better than many market participants initially feared – notwithstanding the risky headwinds currently facing the local economy. At the end of the day, the SA economy requires significant investment to grow and drive sustainable job creation. Whilst the 2024 Budget prioritises macroeconomic stability, structural reforms, and improved state capacity, it will take time to reverse the consequences of operational, maintenance and governance failures at state‐owned companies (primarily those of Eskom and Transnet), decades of policy inertia and years of state capture.

Much ado about GFECRA?

Through the tabling of the 2024 Budget, much ado has been raised around the utilisation of the GFECRA reserves by market participants and commentators alike. Often eyed by certain political factions in their desire to nationalise the SARB, GFECRA forms a significant component of SA’s reserves management framework and safeguards against potential financial crises and external economic shocks. As such, the primary purpose of the GFECRA is to provide a buffer to support the stability of SA’s currency (the rand) and to ensure the country’s ability to meet its international financial obligations, especially during times of economic turmoil or currency volatility. The GFECRA typically consists of gold and foreign exchange reserves, which are held in various forms, such as foreign currency deposits, government securities, and other liquid assets denominated in foreign currencies. In simple terms, GFECRA is a pool of funds currently tallied at R500bn, which does not earn any interest and is liquidity that the SARB cannot use and accumulates because of currency movements. The SARB manages the GFECRA, making strategic decisions regarding allocating and utilising its resources. The aim is to maintain sufficient reserves to instil confidence in the financial system and protect against potential currency crises. During periods of financial stress or when the rand comes under pressure, the reserves held in the GFECRA can be deployed to intervene in the foreign exchange market. This intervention helps stabilise the local currency and maintain orderly market conditions. The SARB regularly publishes reports detailing the size, composition, and performance of the GFECRA as part of its commitment to transparency and accountability in monetary policy and reserve management.

As mentioned earlier, whilst utilising these funds is not against global best practice per se, it naturally raises some concerns. Ifmanaged prudently and spent wisely, these funds can make a meaningful contribution to alleviating some pressure on the SA fiscus. It does not form a long-term solution to the structural ailments facing the SA economy but merely buys SA some time to generate faster economic growth. Moreover, it is important to note that when the rand exchange rate vs the US dollar and other reserve currencies strengthens, the account balance declines – and it is NT that will be responsible for replenishing the GFECRA. Substantial rand appreciation can see marked losses on the GFECRA, which will eventually be for NT’s account (requirement to replenish) if they persist. Dipping into the GFECRA must, therefore, be done with great caution on the part of the government.  

By international comparative standards, the profits of the GFECRA account are particularly large and subsequently attract interest from those seeking to nationalise the funds via the nationalisation of the SARB to gain access to the funds (as stated in some political parties’ manifestos). Naturally, with elections around the corner, many market participants are worried about what the GFERCA funds will be spent on – primarily around the use for current expenditures such as higher public sector wages. Pressure also comes from expanding social grants, which has gained focus amongst the ANC election promises. Thus, there was some relief over using the funds to reduce debt. However, using the GFECRA to reduce debt forms only a temporary measure in a weak economy, with debt likely to creep up again if tax revenues undershoot and the GFECRA cannot quickly be replenished.

The bottom line

A well-managed GFECRA enhances SA’s ability to engage in international trade and attract foreign investment. It assures trading partners and investors that the country has the financial capacity to honour its commitments and withstand external economic pressures. Moreover, the reserves held in the GFECRA provide the SARB with greater flexibility in conducting monetary policy. With a robust reserve position, the central bank can effectively implement policy measures to manage inflation, support economic growth, and respond to changing macroeconomic conditions. Overall, the GFECRA plays a crucial role in safeguarding SA’s economic stability, resilience, and ability to navigate the challenges of the global financial system. It contributes to confidence in the country’s financial markets, facilitates economic growth, and helps ensure the sustainable development of the domestic economy over the long term. As such, careful management of the GFECRA is essential to balance the short-term needs of the economy with the imperative of maintaining long-term financial stability and resilience. It requires prudent decision-making, effective risk management, and transparency to ensure that the reserves are utilised effectively and in the best interest of SA’s economic well-being.

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