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The number-one priority is to focus on reducing unemploymentWhen economic indicators confirmed that South Africa would be hit by the recession, the government began drawing up a collective stimulus framework as a response to the crisis. The framework included a range of principles and programmes with which the crisis would be addressed. While the stimulus package looks impressive on paper, the greatest challenge that Jacob Zuma’s presidency faces, is the timely implementation of these measures as the country feels the pinch from the worst global recession in 80 years.
The framework’s top line agenda is to “protect the poor, the vulnerable, and the unemployed and low-income workers; to strengthen capacity to grow decent work in the future; to maintain high levels of investment and to intervene in a timely, tailored and targeted manner”.
Key areas of focus are investment in public infrastructure; industrial and trade policy measures; a macro-economic policy response; and employment measures. These were divided up between various task teams appointed to take action as per the criteria laid out in the framework upon its approval.
The framework confirms that South Africa’s major public investments programme of R787 billion will be carried out until March 2012 and will encompass a wide range of improvements to national infrastructure. This includes the expansion of national road and rail networks and the improvement of education and health infrastructure.
This major investment will continue to have a major impact on our economy. Few could argue that without it, the effects of the recession could have been much worse.
Industrial and trade policy measures laid out in the framework stress how crucial it is for the economy to avoid de-industrialisation. Key to this is the protection of vulnerable sectors – clothing, textile, mining, motor and manufacturing – and improvement in competitiveness of key local industries.
The biggest loss by far in gross domestic product, since the onset of the recession in South Africa, has been in the manufacturing industry. Although the sector reported an improvement for the third quarter of 2009, it still remains under pressure.
John van Reenen, managing director of local steel product manufacturer Van Reenen Steel (Pty) Ltd, is not convinced that enough is being done to help pressurised sectors: “The government is doing almost nothing to alleviate the effects of the global recession. Not only have we had the recession, but right in the middle of it our rand strengthened by nearly 30%. The effect of this was much worse than the recession. All of a sudden, our mines were receiving 30% less revenue than they did last year, on already depressed prices for platinum, iron ore, coal, and manufactured goods. This means their profits were reduced by 90% in some cases, hence less tax collections.
“Furthermore, because goods produced in South Africa for local consumption (olive oil, olives, jams) have increased by 30% in price because of the strong rand, more companies (Makro, Spar, Shoprite) are importing at cheaper prices, causing more distress to our manufacturing system – the only major job growth engine in South Africa,” he said.
“The government does not understand this simple economic principle and by the time they wake up, we could well have lost 1.3 to 1.5 million jobs in South Africa.”
The automotive sector would benefit greatly from swift government action.
At a press conference at the end of October, managing director of Volkswagen South Africa and president of the National Association of Automobile Manufacturers of South Africa, Dave Powels, announced that the industry faces impending collapse due in part to the government’s delayed response on aid to the industry.
The Department of Trade and Industry (dti) is said to be falling behind on its Automotive Incentive Scheme – part of the Automotive Production and Development Programme – which was meant to have been launched in July 2009 to replace the Motor Industry Development Programme.
The importance of this scheme cannot be underestimated, as it will provide certainty for major companies to make large and long-term investments in the sector.
Despite the gloom, there is a potential lifeline for many troubled businesses – in the form of the Industrial Development Corporation (IDC).
Formed in 1940 to promote economic growth and industrial development in South Africa, the self-financing national development finance institution (DFI) is playing an increasingly crucial role in providing short- to medium-term financial aid to embattled business enterprises.
Shakeel Meer, IDC divisional executive for industrial sectors says, “The IDC has made available R6.1bn for the current and next financial years to assist companies experiencing financial difficulties as a result of the economic crisis.
“To access this funding, businesses need to apply to the IDC, which assesses each application on its own merits, taking into account the company’s historical performance, turnaround plans to return the business to profitability, the strategic nature of the business as well as the capacity and jobs that would be lost if the business were to close down.”
Based on these assessments, the long-term sustainability of the business is determined. As part of this due diligence, discussions with other financiers and creditors of the business are also held to ensure its viability.
Approvals for funding can include moratoria on repayment of loans for a certain period to further assist the business to become independent.
Part of the funding could be applied for as working capital until the business’s cash flow situation improves, or as equipment that would improve the competitiveness of the business.
If the IDC finds that the business’s management lacks skills and experience in certain areas, support can be introduced to assist management in building up the necessary expertise.
In addition, for existing clients, more options are available. Existing facilities can be restructured, allowing for longer moratoria on repayments, capitalisation of interest, or loans can be converted to equity, which also improves the cash flow position of a business.
Minister of Trade and Industry Rob Davies has faith in DFIs such as the IDC to enhance industrial development. At the dti pre-budget vote media briefing in Cape Town in June, he stated, “There is significant scope to make much more strategic use of public entities and DFIs, particularly those within the dti family such as the IDC, to advance industrial development.
“As the ‘special purpose vehicle’ for industrial development, it is imperative that the IDC continues to reorientate its activities towards a more developmental approach to investments in strategic sectors through the provision of finance at attractive rates, accompanied by appropriate conditions for recipients of such financing.”
The IDC has offered resources to the National Jobs Initiative, an integral part of the framework.
It is designed to increase employment and promote further skills development. Employment measures will focus on retaining and increasing employment, using retrenchment only as a last resort, as well as an Expanded Public Works Programme to contribute towards the goal of halving unemployment by 2014.
The government has also put plans in place to work more closely with the various Sector Education and Training Authorities to make more money available to fund the training
of workers.
The future of South Africa’s economy and people relies on the retention and generation of jobs on a large scale. The government’s number-one priority and purpose at this point is to focus on its target of reducing unemployment through carrying out the principles of the stimulus framework in an efficient, targeted and highly impacting manner. We will be better able to measure over the coming year just how successful these interventions will have been.
Finance Minister Pravin Gordhan announced upon his return to South Africa from the G20 Summit in London in September that South Africa will emerge stronger than ever from the recession. Only time will tell whether this confidence is misplaced.
In the interim, the government faces unprecedented challenges as various South African industries clamour for increased financial support. In reality, there are too many demands on Treasury funds and the government has to maintain a fine balancing act to meet the demands of so many. The time for discussion has passed, and immediate and effective action is sorely needed.
Lexi Fincham
