According to recent reports by the International Monetary Fund (IMF), South Africa ranks 75th in the world in terms of debt to GDP ratios. In fact, with a debt to GDP ratio of only 69%, we are seemingly far better off than countries like Sudan (210%), Eritrea (175%), the Cape Verde islands (161%), and Egypt (92%).
We do have one of the most developed economies in Africa and should be striving to be one of the biggest economies on the content. Therefore, we should be measuring ourselves against Nigeria (the largest economy on the continent which has a debt to GDP ratio of 36.88%) and Egypt which is the second largest economy on the continent. South Africa is in third place.
We once held the top spot. However, since 2010, South Africa has faced a number of mounting challenges. Poor economic policy and our inability to create jobs has been a thorn the country’s side that has been snowballing over the past few years. Eskom’s inability to guarantee continuous stable electricity supply also hampers economic development.
Economic growth: a distant dream?
Speaking at the 2022 Deloitte Restructuring Survey Results Presentation, Martyn Davies presented his view on the current economic climate that South Africa faces.
He pointed out that this survey was conducted in January 2022 when green shoots were beginning to bloom for the South Africa economy in the wake of the Covid-19 pandemic. Pent-up demand was being fuelled by consumers who were finally emerging from 18 months of intermittent lockdowns; the accompanying surge in trade triggered a commodity boom, low interest rates provided relief to households and corporates alike, and the first shot had yet to be fired in Ukraine.
Despite these benign conditions, 63% of respondents felt downbeat about growth prospects in South Africa. But this pessimism was far from unanimous. Our C-Suite respondents were far more optimistic than those in the restructuring industry, having experienced the buoyant factors above first-hand along with unprecedented lenience from lenders.
Lenders, on the other hand, were the more sceptical group, which we believe is driven by two key factors: inflation and consumer sentiment.
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Inflation bites
Davies pointed out that, in 2021, global inflation ticked ever higher as demand from lockdown-free consumers in Europe and North America outstripped supply from key hubs in Asia where production continues to be interrupted by draconian lockdowns.
The war in Ukraine is likely to compound this as wheat supply interruptions trigger food inflation and energy prices soar. All eyes will turn to central banks, and the United States (US) Federal Reserve in particular. As Figure 1.2 shows, both the US federal rate and South African repo rate are due a rise. Market commentators disagree on whether this should be a 100, 150 or even 200 basis point increase, but our lender respondents are well placed to foresee the impact on their corporate and retail clients.
Consumers under pressure
Davis added that another key driver for the pessimism of survey respondents is the increasing pressure on consumers. Many of the almost three million jobs lost in the pandemic have not returned and reported unemployment of 35% is now the highest in the world. For those in work, real wage growth has been falling since 2010 while the growth in asset prices over the same period has widened the inequality gap with each passing year. It is no surprise then that consumer defaults are at their highest level since the global financial crisis, despite record low interest rates.
As the gap between rich and poor widens, consumer spending patterns will continue to polarise, and demand for convenience, accelerated by the pandemic, will be the norm. Companies exposed to the South African consumer can either adapt to these trends and thrive or ignore the signs and suffer the consequences.
A view on job creation
A key question asked by Davies during his presentation was: what figure should South Africa be aiming for in terms of economic growth to avoid future calamities?
The issue was discussed by Isaah Mhlanga, Chief Economist at AlexForbes in the run up to the 2022 Budget Presentation.
According to populationpyramid.net, South Africa’s population in 2020 was just over 59 million people. The biggest growth was seen in the 30–34-year-old age demographic, the 25-29 years old age demographic, and the five- to nine-year-old age demographic. According to populationpyramid.net predicts that in 2050, South Africa’s population will grow to just over 75,5 million people with an even spread in growth from the age demographic of 0–4-year-old and 40–44-year-olds.
“This has massive ramifications for us. We cannot afford to take six years to replace the jobs that were lost during Covid” warned Mhalnga. “If we look at economic projections from the year 2000 to 2050, and we assume that our economy will only grow at a rate of 2%/year, unemployment will jump from 40% to close to 50% by 2050. If the economy grows by 3%/year, this stabilises at about 45% by 2050,” said Mhlanga.
He added that, if this growth increases to 4%/year between now and 2050, the unemployment rate will decrease to between 35% and 20%. If the economy grows by 5%/year during this period, unemployment decreases to between 35% and 5%.
This paints a very definite high, middle and low road scenario with 5% growth being the high road, 3% and 4% being the middle road, and 2% being the low road.
The International Monetary Fund predicts that South Africa could achieve 3% growth this year provided that policy actions are implemented.
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How does this impact BRPs?
South Africa’s economic position has a direct impact on BRPs and Turnaround Professionals.
Firstly, it is an indication that the challenges that companies face will only be compounded in the coming months (and possibly years). This means that there will be many more companies seeking informal restructuring or business rescue/turnaround. The challenges that we face are debilitating for those who are not well versed in crisis management.
Secondly, in order to grow the economy in the future, President Cyril Ramaphosa has made it clear that there will be an increased role for private companies who (he feels) may drive the economy better than State Owned Enterprises such as Eskom and Transnet. We have already seen the beginnings of this with the announcement of allowing private companies to access the Transnet rail line and Government openness to a hydrogen economy as well as renewable energy sources.
There are visible signs that Government is genuinely interested in economic reform, and the above projects – over time – will create a platform for the kind of job creation that we need to begin to address the current economic crisis that we currently face. With an expanded role as drivers of the economy, it is up to BRPs and turnaround professionals to work with companies and address operating models so that these companies can accommodate this expanded role and the physical demands on their operations that is associated with this.
However, this economic reform does come with a caveat to Government. While is it welcoming that Government is beginning to expand its view when it comes to job creation and drivers of the economy, South Africa cannot be reliant on one industry to be the sole corner stone of the economy that the mining industry was in the past. We need diversification and focus on the hydrogen economy needs to go hand-in-hand with the work that is being done with regards to spectrum and growing South Africa as a significant role player in the gig economy.
There is hard work ahead for BRPs, but we have the skills and expertise to make South Africa great again.
The Mystery Practitioner is an industry commentator that focuses on the shifting dynamics and innovative thinking that BRPS and turnaround professionals will need to embrace in order to achieve success in their businesses.
