Minister Meyer address: PERO and MERO | Western Cape Government

Speeches

Minister Meyer address: PERO and MERO

15 October 2015

Speech by Dr Ivan Meyer, Minister of Finance

Honourable Speaker and Deputy Speaker

Honourable Premier and Cabinet Colleagues

Honourable Leader of the Opposition

Leaders of other political parties

Honourable members of the Western Cape Legislature

Colleagues

Citizens of the Western Cape

The annual Western Cape Provincial Economic Review and Outlook (PERO) has become a key source of economic intelligence in the Western Cape. PERO reviews the global, national and Western Cape economic performance and outlook, as well as the interrelationships between these three economic spheres.

It not only provides a review and analysis of past and forecasted economic growth, labour market dynamics and socio-economic development of the Province but also identifies the risks and opportunities to the region as a result of changing economic circumstances on a national and global scale.

Honourable Speaker, together with its sister study, the Municipal Economic Review and Outlook (MERO), the Provincial Economic Review and Outlook is a toolkit which facilitates decision making for government departments, public entities, business, national and international organizations interested in investing in the Western Cape. It aims to improve our understanding and insight into the Western Cape economy as part of the evidence-based approach to informing and guiding provincial policy, planning and budgeting. Consideration of the regional economy’s prospects, opportunities and challenges is critical to ensure that the pursuit of economic growth also increases employment, and improves the quality of life for citizens. Hence, continuing with the theme focusing on “Inclusive growth – unlocking opportunities for growth and jobs”.

The concept of “inclusive growth” captures the Western Cape Government’s commitment to grow the economy and create jobs. Therefore the key focus of both the PERO and the MERO is “unlocking opportunities for growth”. The MERO provides a comprehensive overview of the recent economic performance and outlook for the economy at a district and municipal level.

Policy and institutional initiatives

Madam Speaker, the Western Cape Government’s Provincial Strategic and Policy Framework comprise of the OneCape 2040 Vision, Provincial Strategic Plan (PSP) 2014-2019 and Provincial Spatial Development Framework (PSDF) amongst others.  These documents are closely aligned to the National Development Plan (NDP) which serves as a blueprint to substantially reduce poverty and inequality in South Africa by 2030 and the NDP’s implementation plan, namely, the Medium Term Strategic Framework (MTSF) which defines the outcomes and targets of government over a five year period.

According to the NDP, Madame Speaker, South Africa needs economic growth of around 5% per annum to decisively reduce unemployment and poverty, as well as transforming our social and economic order.

 

Honourable Speaker, the Western Cape Government’s Provincial Strategic Plan reflects the PSDF – a critical enabler for development – and the OneCape 2040 vision. The PSP includes 5 Provincial Strategic Goals, namely:

 

Strategic Goal 1:  Create opportunities for growth and jobs

Strategic Goal 2:    Improve education outcomes and opportunities    

                          for youth development

Strategic Goal 3:   Increase wellness, safety and tackle

                           social issues

Strategic Goal 4:   Enable a resilient, sustainable, quality and

                          inclusive living environment and

Strategic Goal 5:   Embed good governance and integrated   

                           Service delivery through partnerships and

                           Spatial alignment

Macroeconomic Performance and Outlook

The changing face of the global economy

Madam Speaker, much has been made of the rising influence of developing and emerging economies.  Due to the rising population growth, increased globalization and incomes, emerging economies such as China, Brazil, Russia and India are starting to represent a much larger share of the global economy. Meanwhile, advanced economies were more deeply affected by persisting financial and fiscal crises. According to the IMF between 2004 and 2014 the size of the Chinese economy increased more than 4 fold and that of Russia doubled. The size of the Indian economy nearly doubled over the same period.

In contrast, the size of advanced economies such as the United States, Germany and France were less than 50% bigger in 2014 compared to 2004.  Japan saw the size of their economy shrink by less than 10% between 2004 and 2014. As a result, China , Brazil, Russian and India now occupy more prominent positions on the world economic stage. China is now the second largest economy with Brazil, India and Russia in 7th, 9th and 10th position respectively.

Global Economic Outlook

Honourable Speaker, since exiting the global recession of 2008/09, global economic growth has been under significant pressure.

The International Monetary Fund (IMF) in October 2015 forecasts global output to rise by 3.1 per cent in 2015 and by 3.6 per cent in 2016.

The expected growth rate for 2015 is significantly lower than the 3.8 percent forecast last year, reflecting the generally more pessimistic economic outlook currently prevailing. The mood may turn more sombre in the course of the year as a more pronounced slowdown in China looks increasingly likely.

South Africa’s Economic Outlook 

Economic activity in South Africa slowed in 2013 as a precursor to the more restrained pace of output growth of 1.5 per cent in 2014.

The usual domestic issues - including labour unrest, infrastructure bottlenecks and a persisting current account deficit – weighed heavily on economic growth.

Most of the decline in economic activity during the second quarter of 2015  can be  attributed to declining output in mining, agriculture and manufacturing.

 Drought conditions impacted on agriculture while the mining sector decline was driven by weakness in coal and iron ore production.

The country’s economic prospects received a further setback by the secondary sector  contracting in the second quarter of 2015 by 4.7 per cent and the tertiary sector easing to growth of only 1.1 per cent.

Household consumption and real consumer spending contributed largely to slower GDP growth as a moderation in employment growth, (particularly in the private sector).

Domestic policy uncertainty remains a concern, especially with respect to creating an environment conducive to private sector fixed investment. Low levels of business confidence and weak domestic demand contributed to a contraction in private sector fixed investment. It declined by 3.4 per cent in 2014 after a growth of 8.1 per cent in 2013.

General emerging market sentiment has, in recent quarters, had a negative impact on the South African economy. Additionally, the vulnerability of the rand remains a key risk.

However, it has also proven to be a double edged sword, boosting exports, but raising the cost of imports. Despite this, recent forecasts from the Bureau for Economic Research (BER) have downwardly revised South African economic growth further from 1.7 per cent in 2015 and 2016 to 1.4 per cent in both years. By implication, the Western Cape GDP growth forecasts for 2015 and 2016 will be lower.

Western Cape Economic Outlook

Madam Speaker and honourable members, the Western Cape still manages to outperform the economic growth of the rest

 of the country. The pace of growth, however, is less than half of what it was at the start of the recession in 2007. After steady growth at an annual rate of 2.7 per cent in 2012, economic growth in the Western Cape slowed  down to 2.4 per cent in 2013.

The better performance by the Western Cape economy is a result of both the structure and source of its economic activity. The tertiary sector, which makes up a greater proportion of the Western Cape economy, remained a strong performer although construction may turn out to be the best performing sector of the decade.

Over the forecast horizon (2015 – 2020) economic growth in the Western Cape is expected to average 2.7 per cent per year. The tertiary sector is likely to be the biggest driver of this growth, as has been the case over the past few years.

Impact of Global Outlook on Western Cape Economy

Madam Speaker, the risk to the Western Cape economy posed by the outlook for global growth is mixed. Although positive for the Western Cape in that our major export partners are growing, this is subject to downside risk if the Euro Zone should experience weaker growth. This is especially true for the food and beverage manufacturing (agri‑processing) sector.

A wide diversity of products underpins why the agriculture, forestry and fishing sector remains a key industry in the Western Cape economy. This is manifested in agri-processing (food, beverages and tobacco) accounting for 38.6 per cent of the Province’s exports.

The economic contribution of primary agriculture is supported by various value chains: its linkages extend to agri-processing producers as intermediate inputs in the production of consumer goods and as backward linkages to its suppliers within the manufacturing and services sector.

Increasing farmer participation in the full agriculture value chain via beneficiation of agricultural products could stimulate inclusive growth and employment creation. The sector with the highest employment and product growth rates over the 2008 to 2011 period was cosmetics from animals and plants (for example, lanolin from wool or rooibos-based skincare products).

The Western Cape was a significant exporter of beverages for the past ten years, accounting for almost 70 per cent of South Africa’s total beverage exports. As mentioned in 2014 PERO, emerging African markets – such as Angola – account for an increasingly large share of beverage exports. African countries and China are becoming increasingly important markets for South African wine exports, while the more traditional European market is a mainstay.

Speaker, seven of the fastest growing economies in the world are on the African continent. It is therefore important that we intergrate our economies.

Tourist spending has a strong, positive and sustainable impact on employment in many sectors and districts of the Western Cape economy. Tourism is one of the sectors in which the Province has a comparative advantage. Tourist spending as part of total spending reveals the reach of tourism into other sectors. It depicts why tourism is such an important sector through which to achieve inclusive economic growth.

Tourism in the Western Cape is characterised by its strong links to the agricultural/agri-processing sectors. The development of unique high-quality Western Cape products, from which niche markets could flourish, links closely with tourism.

A positive outlook for tourism demands that attention be given to the general risks to income levels of consumers, both locally and abroad. Consumers need the ability and desire to spend in the Western Cape and tourist visa requirements detract from the Province’s attractiveness in respect of sport, health and heritage tourism.

Madam Speaker, according to government’s official figures, tourist arrivals are down 8.7%. The largest declines are from Central and South America (40.6%), Asia (26.10%) and North America (9.8%).

Meanwhile the UN World Tourism Organization reports that in the same period (January to April 2015) the industry has grown by 4% worldwide. America leads with 6% growth in departures.

We are losing market share, and this needs to be addressed urgently.

Labour market dynamics

The economy shed 1.1 million jobs in the two years after the local recession hit in the fourth quarter of 2008, more than 90 per cent of which occurred during the first year. It took the economy nearly five years to regain the lost jobs and reach pre‑recession employment levels.

As indicated above, despite this growth in employment, unemployment has continued to grow. The number of people unemployed according to the narrow definition increased from just over 4 million people in the fourth quarter of 2008 to 5.2 million people in the second quarter of 2015.

In South Africa, the narrow unemployment rate is estimated at 25.0 per cent in the second quarter of 2015, compared with the Province’s 21.7 per cent. Including the non-searching unemployed raised the national unemployment rate to 32.8 per cent, while in the Western Cape unemployment rose only to 23.0 per cent using the broad definition. Based on the narrow definition, 627 000 individuals are unemployed in 2015 in the Province.

The Western Cape’s population has grown relatively rapidly over the past five years; as a result, there are now 4.3 million potential workers resident in the Western Cape. The Western Cape’s population is estimated at approximately 6.2 million according to the 2015 mid‑year population estimates, representing roughly 11.3 per cent of the national population.

Socio-economic development in the Western Cape

Economic growth should as a final outcome cause an improvement in the overall quality of life as measured by different socio economic development indicators and on the other hand, socio-economic improvements also benefits economic growth. Provincial government policies directly aimed at these improvements become agents of economic growth by creating conditions favourable for economic development.

The provincial economy generally grew at a faster rate (3.8 per cent) than the population (2.3 per cent) between 2001 and 2013. This resulted in an increase in average income (measured by GDPR per capita) in the Western Cape from R37 502 in 2001 to R44 553 in 2013.

All Western Cape districts and the City of Cape Town improved their Human Development Index (HDI) from 2001 to 2013: the highest was the City of Cape Town at 0.73. The remaining districts’ HDIs ranged between 0.71 and 0.64 in 2013.

The rise in per capita income in the Province, combined with the small improvements in income distribution (Gini coefficient) and HDI, suggests that these indicators are moving in the right direction.

Key messages/recommendations and implications for policy, planning and budgeting

The Provincial interventions need to encourage an economic structure which is more labour intensive to fully utilise the growing unskilled/semi-skilled labour.

Given the Western Cape dominance of the agricultural sector in exports, producers should explore how to diversify both the product composition and the destination of exports.

Within value chains, attention needs to be given to linkages within and across promising sectors.

Investigate the earnings potential of prioritised growth sectors, to ensure that increased employment also equal an increase in standards of living.

Strengthen current skills development initiatives to improve the employability of the youth.

Take actions which maximise the returns of infrastructure investments across spheres of governments and the private sector.

Energy constraints create opportunities for strengthening renewable energy sector.

Explore waste recycling as a potential job creator while simultaneously addressing environmental and financial sustainability issues on a local government level.

Speaker I now turn to the PERO’s companion, the MERO.


The 2015 MERO highlights that economic recovery is on track in all the regions in the Province, with the Eden and Overberg Districts continuing to grow the fastest.
Eden’s real GDPR growth averaged 4.3 per cent between 2005 and 2014, mainly boosted by a strong growth in the Construction (8.0 per cent). Growth is expected to slow down to 2.6 per cent this year, and average 3.4 per cent over the next five years.
The Overberg District economy also expanded by an average of 4.3 per cent between 2005 and 2014, boosted by the finance and business services sector (8.5 per cent) and the construction sector (7.3 per cent). The region is expected to grow by 2.5 per cent in 2015, and an average of 3.3 per cent over the next five years.
The Central Karoo District recorded a growth rate of(3.7 per cent) between 2005 and 2014, boosted by strong performance of the mining and quarrying sector which had an average growth of 12.2 per cent during the period. However, growth is expected to decline to 1.7 per cent in 2015, and an average of 2.5 per cent over the next five years.
The Cape Metro and Cape Winelands District both grew by an average of 3.4 per cent between 2005 and 2014. Strong performance in the Cape Metro was recorded for agriculture (9 per cent), Construction (5.1 per cent) and finance and business services (4 per cent). This year the Cape Metro economy is expected to grow by 1.8 per cent, and an average of 2.6 per cent over the next five years.
For the Cape Winelands District, strong performers during the review period included Construction (6.1 per cent), finance and business services (5.6 per cent), transport and communication (4.4 per cent), wholesale and retail trade, catering and accommodation (4.3 per cent) and general government (4.2 per cent). This year the Cape Winelands economy is expected to grow by 2.0 per cent, and an average of 2.8 per cent over the next five years.
The West Coast District economy recorded a 2.9 per cent growth rate during the review period 2005 and 2014, although its finance and business services sector expanded by a healthy 8.6 per cent and construction by 5.7 per cent. This year the West Coast District is expected to grow by 1.8 per cent, and an average of 2.6 per cent over the next five years.
The agriculture sector recorded very low growth rates between 2005 and 2014 in all districts except the City of Cape Town. Cape Winelands (0.7 per cent) and Eden (1.7 per cent) recorded meek positive growth rates whilst West Coast (-0.1 per cent), Overberg (‑0.1 per cent) and Central Karoo (-0.5 per cent) agricultural sectors contracted. This remains a cause for concern as agriculture is a key sector and a major employer in the Province. However, the sector is expected to return to positive territory across the regions over the next five years, with a growth rate of 2.8 per cent expected for the Cape Metro, 2.5 per cent for the Cape Winelands and 2.2 per cent for Eden.
Sectors that are expected to perform strongly over the next five years include finance and business services (4.0 per cent), construction (3.7 per cent) and transport and communication (3.1 per cent).

Speaker, spatially it is evident that there are two major nodes of economic development in the Western Cape, namely the Cape Metro and what may be regarded as the Eden ‘sub-node’ at this stage.

The Cape Metro node has, a number of municipalities closely integrated with itself, namely Stellenbosch and Drakenstein; Saldanha and Swartland; and Theewaterskloof and Overstrand. The Cape Metro is closely integrated with the two leading Winelands municipalities of Stellenbosch and Drakenstein – the combined GDPR accounted for 80 per cent of Western Cape in 2013. 

The Eden ‘sub-node’ hosts the coastal municipal economies of George, Mossel Bay and Knysna, accounting for 70 per cent of economic activity in the Eden region. Although, the Eden ‘sub-node’ (consisting of the five leading municipalities in the region) only contributed an estimated 7 per cent to Western Cape GDPR in 2013; it has been the fastest growing region in the Province. 

Both the Winelands and Eden economies are geographically better balanced in that they each contain sizeable outlying municipal economies, such as Breede Valley, Langeberg and Witzenberg in the Winelands; and Oudtshoorn and Bitou in Eden.

The rising Human Development Indices (HDIs) across all six regions between 2001 and 2013 is indicative that economic growth is having a positive impact on social development in all regions.  Furthermore, areas which recorded higher economic growth than population growth experienced positive growth in per capita income levels and standards of living.

Implications/Recommendations for Municipal Policy, Planning and Budgeting


Honourable Speaker, the MERO suggests that the increase in the informal sector has implications for skills development and social policy.
There is a need to support the development of midstream activities.
Industry support services such as schools, social amenities, hospitals need to be explored in for example the WCD (Saldanha IDZ)
Infrastructure development and maintenance with specific reference to backward and forward linkages offer opportunities. The Western cape will be spending R17.3 billion on infrastructure development over the next three years.
Tourism - quality lifestyle destinations as well as health, sport and cultural tourism must be promoted

The MERO further highlights the following Special Economic Opportunities :

Metro: Oil and gas /Atlantis GTIP/CHIP

West Coast District: Saldanha IDZ –infrastructure & services

Cape Winelands District: Low growth in food and beverage: agri-parks/tourism

Overberg District: small scale farming/niche markets/tourism

Eden: agri-processing higher employment potential vs petrochemical industry

Central Karoo District: tourism marketing/agri opportunities (Beaufort West/Laingsburg)

Conclusion

 Honourable Speaker, the 2015 PERO & MERO highlight that the current global and domestic economic environment is particularly weak amidst a less than desirable economic growth outlook. Persistent unemployment, coupled with increasing population pressures and dynamics linked to youth, gender and race remain key challenges in the Western Cape. Other domestic constraints impacting on the economic outlook relate to energy, infrastructure and skills shortages; while outcomes related to education, health and broader social ills continue to impact on and are affected by the levels of economic development.

These economic pressures emphasize the fundamental need for thorough integrated development planning, considered decision making, active economic transformation and appropriate policy responses which will in turn stimulate economic and human development.

Honourable Speaker, South Africa’s economy is facing structural problems and as a country we must address these.

Firstly, South Africa’s total revenue is R1.1 trillion. South Africa’s public sector expenditure is R1.4 trillion. This means that South Africa will have a R300 billion shortfall in 2015

Secondly, South Africa’s current debt to GDP ratio is 42%. It has grown from 21% in 2008 to the current 42%. If one takes into consideration the state guarantees of state-owned enterprises like ESCOM and SANRAL the debt to GDP ratio could be as high as 47%.

Thirdly, the current labour legislation impacts negatively on investment.  South Africa urgently needs labour law reform to encourage investment, grow the economy and create jobs.

Fourthly, the level of saving as a percentage of GDP is also low and is currently at approximately 13.5 % which is the lowest amongst the BRICS countries. To grow the economy we need savings at higher than the current levels.

Fifthly, the levels of corruption in South Africa are far too high. Corruption is destroying opportunities and increasing poverty. Public perception confirms that South Africa must address corruption.

Sixthly, the current wage agreement for public servants of 7% is costing the fiscus R50 billion over the next three years. Wage agreements above inflation are not sustainable. We need a new approach to wage negotiations in the public sector. The South African tax payer can no longer afford to fund higher than inflation wage increases.

Honourable Speaker, we cannot continue to blame the world economy for our poor performance. South Africa has domestic structural weaknesses and it now requires leadership to implement pro-poor, pro-jobs, pro employment strategies.

As leaders, we must implement the National Development Plan.

Madam Speaker, the policy implications of the 2015 PERO and MERO research findings strongly reiterate the strategic priorities and initiatives encapsulated in the 2014 -2019 Provincial Strategic Plan. These include creating an enabling environment through energy security, reducing red tape, skills development and promoting infrastructure led growth. The MERO’s research findings will complement and inform the Integrated Development Plans of the respective municipalities to ensure the effective use of resources, improved service delivery, attract additional funding, strengthen democratic values and to promote inter-governmental cooperation.

Madam Speaker, the PERO and the MERO present the harsh, clinical realities of the South Africa and Western Cape economies. Next week, 21 October 2015, National Minister of Finance, Mr. Nhlanhla   Nene, will outline national government’s fiscal and financial policy for the next three years when he tables his Medium Term Budget Policy Statement (MTBPS) in the National Assembly.

On 19 November, I will come back to this House to present this Government’s fiscal policy responses for the next three years when I table the Western Cape Government’s Medium Term Budget Policy Statement.

Madam Speaker, I wish to express my sincere appreciation to the team who has contributed to this year’s research and publication, particularly the Treasury’s Budget office staff and the Bureau for Economic Research,  and also those who will carry it through into the government’s policy, planning and implementation programme.  

Madam Speaker, it  now gives me great pleasure to table the 2015 Provincial Economic Review and Outlook and the 2015 Municipal Economic Review and Outlook for consideration in this House.

I thank you

Media Enquiries: 

Daniel Johnson
Media Liaison Officer/Spokesperson to Dr Ivan Meyer Minister of Finance
Cell: 079 990 4231
E-mail: daniel.johnson@westerncape.gov.za