MTBPS highlights low-growth threat

4 November 2024 – This week, we ask: will Cabinet concede that faster economic growth requires politically difficult reforms? Positive signs for SA's greylisting emerge but in manufacturing, ArcelorMittal's KZN plant faces closure. Botswana elects its sixth president, and global corporate giants shun DEI initiatives.

MTBPS highlights low-growth threat

The 2024 Medium Term Budget Policy Statement (MTBPS) presented by finance minister Enoch Godongwana revealed a struggling economy that continues to exert severe pressure on the fiscus. The National Treasury downgraded its 2024 GDP growth forecast from 1.3% in February to 1.1% now. For 2025 to 2027, it expects a paltry 1.8% growth per year.

Estimated tax revenue for 2024/25 has been revised downwards by R22.3 billion compared to the February budget. The deficit is now expected to be 5% of GDP rather than 4.5%, while debt to GDP is expected to reach 74.7% instead of 74.1%. Of every Rand the government collects in the form of tax revenue, 22 cents go to servicing the debt, leaving just 78 cents to fund government activities. Treasury expects debt to peak at 75.5% in 2025/26 before it starts to come down.

There is merit in the fact that Mr Godongwana and his Treasury colleagues acknowledged the tight fiscal space in which the government needs to operate. It adds a pinch of realism to the sugar high that has accompanied the formation of the Government of National Unity. According to the Financial Mail’s Claire Bisseker, Mr Godongwana told the media in a pre-budget briefing: “Our challenge is a growth problem.”

The minister is right: low growth lies at the heart of most of the nation’s problems. The risk is that the finance minister’s cabinet colleagues do not grasp this — or fail to realise that achieving the required levels of growth needs politically difficult reforms.

Greylisting: an end in sight

South Africa has made good progress in addressing the deficiencies in its ability to counter money laundering and terrorism financing, meaning that it could exit the Financial Action Task Force’s grey list within the next 12 to 18 months. Of the 22 items which South Africa had to address, 16 have been largely or fully addressed. If the remaining six were resolved by February 2025, South Africa could be removed from the grey list as soon as June 2025.

However, the Treasury has cautioned that this is unlikely because the remaining items require more time to address. Three of the outstanding items relate to investigating and prosecuting financial crimes, while the other three relate to identifying the beneficial owners of trusts and companies and to the imposition of sanctions and remedial actions by designated authorities. A quick exit from the grey list would help restore South Africa’s reputation as a sophisticated and well-run financial and investment jurisdiction.

Newcastle steels itself for plant shutdown

South Africa’s only integrated steel production facility, which makes steel from raw materials such as iron ore and which supplies about 50% of the steel in South Africa, is facing closure. The ArcelorMittal steel mill near Newcastle currently produces around 1 million tonnes per year, around 45% less than its design capacity of 1.8 million tonnes per year. Low utilisation rates make the plant unprofitable to run. Regional demand for high-value steel is only around 400,000 tonnes and dropping, according to Kobus Verster, the chief executive of ArcelorMittal.

Market distortions created by government intervention are compounding the company’s woes. Mini mills, smaller plants which make steel from scrap metal instead of ore and supply about 20% of the market, are benefitting from government subsidies and protection. They are granted cheap finance through the government’s Industrial Development Corporation. This encourages overinvestment in production capacity, driving down steel prices. Mini mills are also benefitting from input prices artificially lowered through a government rule requiring that they be offered scrap steel at a 30% discount on the global price, while exports of scrap steel are discouraged by means of a 20% export duty.

Donald MacKay, founder and CEO of XA Global Trade Advisors, said that mini mills were commercially not viable on a competitive basis. But government intervention had artificially revitalised them, as substantial state funding was pushing more capacity into a market that was at overcapacity.

If the Newcastle plant is shut down, it will affect not only 3,500 company employees, but also the mines and quarries supplying raw materials to the mill, as well as downstream manufacturers specifically set up to work with the products made by the plant. South Africa will lose an important component of its economic complexity and industrial capabilities, and taxpayers will have to keep subsidising the mini mills to the tune of billions.

To avoid this, the government will have to find a way to rectify the market distortions it has created. If the large-scale infrastructure builds promised by the public works minister, Dean Macpherson, materialise, it would create more demand for the steel produced in Newcastle; in combination with faster economic growth, this could help the plant return to profitability.

Political watershed in Botswana

For the first time since independence in 1966, the Botswana Democratic Party (BDP) will not govern Botswana. In an election held on Wednesday, the Umbrella for Democratic Change (UDC) emerged victorious, winning 36 of the country’s 61 elected parliamentary seats, up from the 15 it won in 2019. The previously dominant BDP was demoted to fourth place, obtaining just four seats, down from 38 in 2019.

Outgoing President Mokgweetsi Masisi conceded defeat on Friday morning, saying: “I will respectfully step aside. I wish to congratulate the opposition. I respect the will of the people.” His successor, Duma Boko, is a Harvard-trained lawyer and the leader of the victorious UDC.

With this, Botswana joins the group of southern African countries where former liberation movements have lost their majorities democratically and conceded their loss. The group also includes South Africa and Zambia. Others, like Mozambique and Zimbabwe, remain in the grip of authoritarian regimes holding on to power by undermining democracy.

Mozambique, on which we reported last week, has been wracked by mass protests since the election. At least ten people have been killed, opposition leader Venâncio Mondlane is in hiding in South Africa, and social media including WhatsApp, Facebook and Instagram have been intermittently shut down.

Jurisdictions which uphold the rule of law and consolidate democracy offer investors more attractive opportunities than authoritarian regimes such as Mozambique and Zimbabwe, which is reflected in lower incomes and less investment. Instability in such countries also poses a risk to neighbours such as South Africa in terms of population displacement, perceived investment attractiveness, and regional reputation.

The changing tide of DEI

Aircraft manufacturer Boeing has shut down its diversity, equity and inclusion (DEI) department, according to reporting from Bloomberg. The DEI vice-president, Sara Bowen, has resigned, and departmental staff will be reassigned to other human-resources roles.

The decision forms part of recently appointed CEO Kelly Ortberg’s response to pressure from conservative activists as well as commercial pressure. Boeing shares are trading at around $150, down from $370 five years ago, with the president of the Emirates airline, Sir Tim Clark, suggesting Boeing was at risk of bankruptcy unless it improved its equity position.

The company’s safety and quality processes came under scrutiny following two fatal crashes involving its 737 Max model, as well as an in-flight door failure in January 2024 where a door plug intended to be secured by four bolts had in fact been installed without those bolts. Boeing is intending to lay off 17,000 workers, or around 10% of its global workforce.

Elsewhere too, DEI policies, which until recently were the flavour of the month in US corporates, are falling out of favour. Retail firm Tractor Supply announced in July that it was eliminating DEI roles; in August, motorcycle manufacturer Harley-Davidson dropped DEI initiatives, having shut down its corporate DEI function in April; and in October, Toyota Motor Corporation circulated a memo to its employees and dealers announcing that it would refocus its community activities “to align with STEM education and workforce readiness” and end its participation in the Corporate Equality Index and other corporate culture surveys.

Consulting firm Spencer Stuart reports that chief diversity officers last just 2.9 years on average in their roles, the shortest of all C-suite roles tracked by the firm and more than 30% below the average of 4.6 years. Other companies are doubling down on DEI, however. Footwear brand Nike, for instance, has just promoted Kizmet Mills to DEI chief. She is the fifth person to hold that position since 2020. Nike’s share price is at around $77, down from $177 three years ago.