The North West University (NWU) Business School's quarterly Policy Uncertainty Index (PUI) remained high at 57.4% in the second quarter of the year, an improvement on the 59.8% during the first quarter of the year.
It remains at the highest levels since the PUI was launched in early 2016, notes NWU School of Business and Governance Professor Raymond Parsons.
"The PUI in South Africa is likely to remain elevated in the months ahead until more certainty has emerged around key factors, including the extent to which the rigorous fiscal planning outlined in the revised budget will be implemented in practice, given the poor track record in fiscal consolidation to date."
Further, the extent to which the markets, business and analysts see the new fiscal targets as credible is another key factor. Credit rating agencies have expressed strong doubts about South Africa attaining the revised fiscal objectives by 2023/24.
Additionally, the strength of any political resistance to certain proposed policy changes, the tangible commitment of government to pro-growth structural reforms and the future trajectory of Covid-19 in South Africa will have an impact on the index.
The combination of these factors is likely to keep the PUI in negative territory for the time being, says Parsons.
"There are correlations of the PUI with economic outcomes. Empirically, it shows that when economic policy uncertainty is strongly present in the environment, it lowers investment, employment and output. High levels of such policy uncertainty inhibit meaningful investment and consumption.
"Elevated policy uncertainty in many countries contributes to sluggish growth. Economic policy uncertainty, then, has consequences for the economy.
"An overwhelming number of negative factors arising from the coronavirus inevitably continued to dominate the calibration of economic and policy uncertainty in South Africa over this period. It should also be recalled that, whereas for most other economies the coronavirus interrupted a boom, for South Africa, it deepened an existing recession, with an economy that already had very weak economic pre-conditions," he points out.
First-quarter gross domestic product (GDP), which contracted by 2%, was the third consecutive quarter of negative growth, after having contracted in both third and fourth quarters of 2019.
Given these formidable economic challenges, the good news was the government’s prompt decision to announce in April a special economic support package of R500-billion (estimated at about 10% of GDP) to help cushion the impact of the Covid-19 lockdown on distressed households and businesses in the economy.
This has been reinforced by a supportive monetary policy designed to lower borrowing costs and avoid a liquidity crisis in the economy in view of the Covid-19 financial stresses. The South African Reserve Bank (SARB) has taken steps to reduce economic uncertainty by easing liquidity pressures, including purchasing bonds from the secondary markets to smooth market functioning.
Meanwhile, the consumer price index slowed to 3% in April, with the ‘factory gate’ producer price index down to 1.2% in the same month. The SARB’s inflation target band is 3% to 6%, with a midpoint goal of 4.5%. If this downward trend in inflation continues, there might be scope for another cut in interest rates of, say, 50 basis points to further reduce borrowing costs for business and consumers.
The lockdown in South Africa has now been reduced to Alert Level 3 and most of the economy is being steadily reopened. Recent high frequency economic indices suggest the overall recovery will, perforce, be slow. GDP data for the second quarter will be weak.
Real GDP is likely to contract by about 8% this year and to recover to about 2.5% in 2021.
"It is now a question of what more is needed to promote sustained economic recovery, and to reduce uncertainty among both business and consumers. Most of the current socioeconomic relief measures in South Africa are due to expire in October.
"The path of the coronavirus, of course, still remains unpredictable. This in itself is a source of further economic uncertainty. A further spike in infections could lead consumers to choose to stay at home for their own protection or South Africa possibly seeing higher levels of lockdown being reimposed in certain ‘hotspots’."
However, the outcomes of the supplementary Budget on June 24 will also have an important influence on future PUI levels.
"On the positive side, Finance Minister Tito Mboweni was candid in confirming that South Africa was facing its biggest budget deficit (a deficit-before-borrowing of 15.7% of GDP in 2020) on record and the largest GDP contraction this year since the 1930s (-7.2% in GDP). Stakeholders then knew the magnitude of the fiscal challenges and what action was being planned," states Parsons.
A revised fiscal framework was, therefore, provided to steer the difficult path between economic support now and fiscal sustainability later. Given the soaring public debt trajectory the supplementary budget statement emphasised what urgent changes were needed in fiscal management to avert a sovereign debt risk crisis in future.
Looking ahead, Parsons says there was a welcome emphasis in the revised budget on infrastructural spending as an important catalyst of future growth, with enlarged opportunities for public-private sector partnerships. The government’s infrastructure symposium on June 23 announced 77 projects ready to be rolled out.
"Economic recovery in South Africa, therefore, now broadly depends on trends in the world economy, the efficacy of the economic support measures taken so far, and the successful implementation of the lockdown exit strategy," says Parsons.