The Global Financial Crisis
Acknowledgements
I am a keen gardener. Like all avid gardeners I have a confession to make: I am a moody gardener. Rumours of rain cheer me up and I get immense joy from spotting the first green shoots in my vegetable garden. The anger and disappointment to discover the very next morning that my tender seedlings have been devoured by cutworms cannot be described.
As MEC for Finance I am equally thrilled when I hear rumours of green shoots in the economy, especially after the drought caused by the global recession. And they are there according to recent headlines; “Relief as South African exports recover,” “Business confidence perks up,” “International Monetary Fund (IMF): South Africa’s recovery imminent”.
The news has been full of optimistic talk about how the first recession to hit our nation in 17 years is finally turning around. But when one looks closely one will find that next to some stronger looking shoots, other are wilting and some have not yet emerged. Reserve Bank Deputy Governor Daniel Mminele is carefully optimistic. Basing his comment on the composite leading business indicator, he said that the South African economy “may emerge from the recession later this year.” Other economists predict that the recession will last into 2010.
Economists are not sangomas and economics is not an exact science. But rumours of “rain” bring hope. And we will keep scanning the ground for more green shoots, they will certainly come. And hope we need.
Since October 2008 to date, more than 500 000 formal jobs have disappeared in South Africa. KwaZulu-Natal, which has become a global player, has been especially hard hit. More than 117 000 people lost their jobs in the first quarter of 2009, and a further 57 000 in the second quarter of this year.
These cutbacks in the formal sector emphasised the dependence of the “second economy” on the core economy.
Employers tried to avoid retrenchments by slashing overtime and moving to shorter weeks. According to Neva Makgetla, lead economist at the Development Bank of South Africa the number of workers getting overtime has dropped by 13 percent in the past seven months. The lower pay they receive in turn affected the demand for domestic workers and hawkers.
According to the quarterly labour force survey 400 000 informal and domestic positions have disappeared. Almost one in 10 hawkers lost their income. In KwaZulu-Natal about 38 000 domestic workers, gardeners, nannies and other people employed in private households across KwaZulu-Natal lost their jobs between April and June this year, as KwaZulu-Natal’s middle classes cut their household budgets drastically during the recession.
The expanded definition of unemployment, which includes discouraged job seekers, now sits at a whopping 34 percent in KwaZulu-Natal. Our young people are desperate to enter the job market. It was heartbreaking to read that 20 000 young people applied for only 300 learnerships at the Durban Metro Police. The problem with statistics is that they lack a human face. Call it what you want, being laid off or downsized, losing your job hurts. It is one of life’s most traumatic experiences.
Some people lose their houses, their cars and other possessions. It is heart breaking when parents are unable to provide bread on the table. Family tensions increase, often resulting in divorce and worse. Sadly the effects are mostly likely to be felt by the poorest. And the hardest hits are likely to be women, who form the vast majority of the poor. Women are most likely to have jobs in the informal sectors of the economy with virtually no job security: and are the first to get laid off.
Even when they have jobs within the formal sector, women are disproportionately affected by global financial problems. They are more likely to be unskilled in comparison to their male counterparts in factories and are then more likely to be made redundant first. Sadly the children and families, who had nothing to do with the excesses that caused this downturn, are those who are suffering greatly.
Sadly, what has happened in South Africa and in our province is the ripple effect of a massive rock that struck the United States economy. Let me briefly share some of the worse economic statistics that explain the current economic woes. Between 2003 and 2007 in the United States:
* real estate loans largely sub-prime increased by 183 percent
* total revolving credit increased by 80 percent
* total consumer credit outstanding increased by 91 percent
* United States government debt with banks increased by 48 percent
* personal savings decreased by 70 percent
Approximately 80 percent of United States mortgages issued since 2003 to sub-prime borrowers were adjustable-rate mortgages. However, when the train finally crashed, the impact was worse than anticipated. When interest rates began to rise, United States house prices began to decline and refinancing became more difficult as adjustable-rate mortgages began to reset at higher rates.
Mortgage delinquencies (defaults) soared. The result has been a large decline in the capital reserves of many banks and tightening credit around the world. The housing market crashed very rapidly. Bad debt and bank foreclosures soared. Many banks went into liquidation and the liquidity in the financial markets disappeared. This was the making of a “perfect” financial storm that would spread across the globe within a short space of time.
The economy in the United Kingdom, our major trading partner, registered a contraction (minus 1.9 percent) in the first quarter of 2009. Even China, for long the growth engine of the world economy was affected, with exports and imports in January 2009 reflecting a 17 percent and 43 percent decline respectively compared to the previous January.
The impact on the South African Economy
The South African domestic financial sector has remained intact, thanks to our robust financial sector regulatory regime. But as I have mentioned we have not been spared. With a decreased global demand for our products we could not escape the crisis. For the first time in 17 years, South Africa has slumped into an economic recession, registering a 6.4 percent contraction in gross domestic product (GDP) in the first quarter of 2009 from 1.8 percent contraction in the last quarter of 2008.
According to the latest global insight statistics the KwaZulu-Natal economy contracted by 9.7 percent in the first quarter of 2009, 3.3 percent more than the national contraction. KwaZulu-Natal did much better in the second quarter. It is estimated that provincial GDP increased by 3.73 percent during the second quarter of 2009. On a seasonal adjusted basis the provincial economy experienced a decrease of minus 1.65 percent and minus 1.06 percent during the first and second quarters of 2009 respectively.
In times like these, common sense dictates that a caring government needs to respond appropriately to cushion its citizens from the devastating effects of a recession. However, a question often asked is how a government should respond during a recession. A combination of multiple and well thought through and perfectly synchronised strategies have proved to be effective in minimising the effects of recessions.
Our President, Mr Jacob Zuma, promised that although the economic downturn will affect the pace at which our country is able to address the social and economic challenges it faces, it will not alter the direction of our development. World Bank Chief Economist for the African region, Dr Shanta Devarajan, said at the South African Institute for International Affairs last month that some African countries’ rescue plans are better than those of the United States’ President Barack Obama. Devarajan said that countries with a cautious policy and fiscal room to manoeuvre before the crisis maintained their mid-term expenditure plans. He praised South Africa and Zambia, in particular, for maintaining a counter-cyclical policy.
What are our rescue plans?
Increased government infrastructure spending
The worst thing to do during a recession is to reduce government spending. Increased spending, given the fiscal constraints obviously, has proved to be one of the most effective methods of mitigating the impact of a recession because it has the effect of stimulating economic growth. However, it is not any type of government expenditure that stimulates economic growth. Expenditure on current consumption has proved to have the undesired effect of increasing fiscal deficits with little evidence of economic stimulus.
Therefore government has to spend public money wisely: Expenditure in infrastructure has been very useful in creating employment opportunities and improving the competitive advantage of countries, thus minimising the effects of recessions. As an acknowledgment of the stimulating effect of infrastructure investments, KwaZulu-Natal for its part, will increase infrastructure spending from R9,7 billion in 2008/09 to R10,9 billion in 2009/10 and eventually to R12,8 billion in 2011/12. These are huge investments and if spent wisely, these investments will create employment opportunities, cushioning our citizens from the devastating effects of this recession.
Expanded Public Works Incentive Programme
The 2009/10 budget makes available R84 million for KwaZulu-Natal through the newly created Expanded Public Works Programme (EPWP) incentive conditional grant. This grant provides an incentive to provincial departments to utilise labour intensive methods of service delivery, as encapsulated in the EPWP guidelines. As the programme is designed to operate on a claim-back basis, there is no “ceiling” on what the province can claim, as long as the guidelines are adhered to.
It is therefore important for all provincial departments to take advantage of this grant and employ as much labour as possible to deliver services and create employment opportunities at the same time. This will help our people in KwaZulu-Natal, absorbing some of the recession blows. In the face of such severe global economic turmoil our efforts should now individually be focused on protecting the poor, providing job opportunities to create a better life, and on creating wealth at the bottom of the economic pyramid. We will do this by increasing investments in social services, which will include food security, education, skills development, health services, and in development of infrastructure.
Monetary policy
Many developed countries have used monetary policy to ease the effects of the current global recession. For its part, the South African Reserve Bank has also dropped the lending rate (repo) by 550 basis points in a very short space of time. Reducing the cost of borrowing is an attempt at injecting some liquidity in the market. At a household level, the reduction in the lending rate should improve the cash flow position and reduce the possibility of bank repossessions of household assets.
Fiscal prudence
During a recession, it is crucially important for government and households to maintain fiscal prudence that is; spending within the means, especially when it comes to current expenditure. As indicated earlier, expenditure on current consumption does not mitigate the effects of a recession. In fact such expenditure makes matters worse. It is therefore important for all government departments to ensure that expenditure on “nice to haves” is eliminated.
As government we must spend public money wisely! The same applies to households. Often we spend money on things we don’t need and we are paying more than we need to pay. We are calling upon all citizens of this province to start reducing their level of indebtedness and start saving. According to a report by Metropolitan retail Chief Executive Phillip Matlakala, South Africa’s low savings rate is one of the biggest factors contributing to its relatively low growth rate. And our savings trend is worsening! According to Matlakala a high saving rate for any economy is a yardstick of health and sustained growth. “High domestic savings were the hallmark of the Asian Tigers during the eighties and today. China, one of the world’s fastest growing economies, has followed the same trend, having the world’s highest savings rate,” the chief executive officer reported.
While it is understandable that South Africans spent the last few years acquiring assets, following the improvement of the income of 2,4 million households between 2005 and 2007, we must now be sensible and save, given the global situation.
* Purchases should be limited to necessities and these purchases should not be done on credit
* Borrowing for current consumption is a deadly concoction during a recession. We urge you to refrain from using credit cards unnecessarily
* If at all possible, fast-track your mortgage bond repayments by paying more than the minimum monthly amounts
* Take advice from your financial advisors and consolidate your debt portfolios
* It is also important to keep your current employment and become valuable to your employer. The more valuable you are the slimmer are the chances that you might be retrenched when things are not going well.
One Home One Garden
Currently an estimated 13 million South Africans benefit from the social grant system. While it has certainly worked against poverty, government wants to encourage self-reliance among the able-bodied. To ensure that our people, at the very least have food to eat, our Premier, Dr Zweli Mkhize, launched the ‘One Home, One Garden’ campaign earlier this year. Food security is one of the key priorities for this government in the next five years. According to the
Department of Agriculture, Environmental Affairs and Rural Development 3,5 million people in KwaZulu-Natal do not have regular and permanent physical and economic access to a basic food supply which is sufficient to meet their nutritional needs.
This translates into 583 000 households (if we use an average of six people per household) who live in fear of starvation. Most of these households have access to arable land. As part of the food security delivery model, the Department of Agriculture, Environmental Affairs and Rural Development provide agricultural production packs, lasting one year, to these households so that they start their home gardens.
As part of food security, community gardens will also be revived through the crop mass mobilisation programme. This programme will include mechanisation such as the supply of tractors and ploughs which will be managed by the agricultural cooperatives. Training will be intensified through agricultural extension services. Further Education and Training (FET) colleges, as well as agricultural colleges will also be pulled in to provide essential skills in agriculture.
When fully implemented, this programme will eradicate food insecurity in KwaZulu-Natal and will revitalise the commercial agricultural sector which has been declining in the past years. With these strategies, we will weather the recession storm and kindle the fire of hope in our province.
Crisis or opportunity
The Chinese say, “When the winds of change blow, some people build shelters, and some build windmills.” The global recession has certainly brought pain but it can also be an opportunity for gender change. British gender dynamics expert Pauline Crawford raised eyebrows when she wrote that the current global downturn has been fuelled by an arrogance, risk taking and poor decision making of a male dominated financial sector.
Rana Foroohar and Susan H Greenberg report in NewsWeek that economists, consultants, and other business types have begun to track the rise of a new emerging market in the last few months. This market may end up being the largest and most powerful of all: women. A new study by the Boston Consulting Group has indicated that women are now poised to drive the post-recession world economy, an August report by Goldman Sachs entitled “The Power of the Purse” proclaims women the economic engine of the future.
Sachs said that future spending by women, “should support the development of human capital” to a greater extent than spending by men. “This,” he suggested, will fuel “economic growth in the years ahead”. At the same time, the report notes, economic growth continues to bolster gender equality, a virtuous circle that has already had massive impacts on the status of women around the world.
The rise of women as a grand, cross-border emerging market could have far reaching implications. Research suggests that women’s spending patterns may be exactly what the world needs at this moment. “Economists have studied how women spend in comparison to men, and they tend to spend more on things that are linked to people’s well being, like health and education. They also tend to save more, and exhibit less risky financial behaviour,” notes Yassine.
Fall, senior economic adviser for United Nations Development Fund for Women (UNIFEM), the United Nations agency dedicated to women. Meanwhile, as women gain greater power at the political level, there will also likely be macro-economic spending shifts. A study last year of Britain’s Parliament found that since 1997, when the country doubled its female representation in Parliament to 18.2 percent, family issues such as tax credits, health care, child care, and education have received more money and more attention.
Likewise, in India, increased levels of female participation in local government have resulted in them taking on 60 percent more water projects than their male counterparts. Of course, there’s widespread consensus now that government spending on health, education, and social safety nets are exactly what the world needs to get growth back on track. If women can help do that, with political power as well as the power of the purse, they may be the catalyst for any number of new growth markets.
The South African government believes in our women. We are all familiar with the African proverb that says: to educate a boy is to educate an individual, but to educate a girl is to educate a whole nation. We have made great strides in reversing the past regime’s legacy of deliberate underdevelopment and there are many inspiring stories about women, who have grown from humble beginnings to well respected business women. The increasing number of women in parliament and senior management positions in government is also proof of government’s commitment to women. Half of the KwaZulu-Natal’s Cabinet is now women.
But while there has been an increase at the top of the pyramid, there is scope for more and much more should be done for women in the bottom part of the pyramid. Given the developmental state of our country government has to be pro-active in addressing these imbalances. Our preferential procurement system, which gives bonus points to companies owned by women when tenders are awarded, is probably government’s most well known incentive. A good example of how this system has helped previously marginalised women are the success stories of some of the women contractors who were appointed in 2004 to help the provincial Department of Education with the building of classrooms, toilets and other infrastructure.
The Fast Track programme, using emerging contractors from the pool of youth and women entrepreneurs, was introduced in addition to the normal infrastructure programme. An indication of the training and involvement of women in the construction industry is evident in the Fast Track Four and Five programmes where 49 percent of the total contract values for the 2008/09 financial year were given to women owned contractors. This amounts to more than R70 million in female pockets.
The small contractors were given the opportunity to grow from GB 1 of the Construction Industry Development Board (CIDB) rating to GB5, enabling them to compete with construction giants such as Murray and Roberts and Group Five in the construction industry. This programme has really been a success story and many women are now running sustainable enterprises and tendering for big contracts, due to their upgraded CIDB ratings.
It is important to realise that while women are given preferential treatment when it comes to the awarding of tenders they must also step up and deliver a good service. Government wants value for money and you will be hearing this more and more. Value for money entails-in addition to the cost of goods and services-quality resource use, fitness for purpose, timeliness and convenience.
Quality of service is crucial if you want to sustain your business. When the roof of a classroom or house blows off with the first wind because the contractor did not use the specified nails which should be of a certain length, we will certainly not use that contractor again. Quality, quality, quality! It is crucial for securing the next job, whether it is in government or in the private sector.
Some women spend their lives chasing government tenders without having a service or product to offer. They rush off to get onto government’s data base and may eventually secure a huge job. When they don’t have the capacity they immediately outsource and pay someone else to do the job, not learning anything in the process. Others do have the capacity but spend all their energy on that one huge job that they have secured with government. They do not look for new business and after the completion of the government tender their businesses die.
This is an excellent time for businesses to use the “quiet” period to restructure their businesses, train their employees and look for new markets. We must start to think globally. There are no limitations. Not only will the new airport bring in tourists but it will also open up opportunities to export perishables, for example; vegetables, flowers, etc.
So much has been done for women empowerment and we are getting support from all spheres. But we as women must use those opportunities. We must find business, business will not find us. All departments and municipalities have gender desks. Contact them; find out what projects the departments and municipalities are planning. Get more detail from the relevant departments on their strategies to procure services through cooperatives and small business. Put out your feelers and contact people to find out what are the wants and needs of the different markets.
Touch base with the local chambers’ women empowerments’ desks. They often offer workshops and training free of charge. Learn from other people in the industry and network. If you don’t network, your business will not grow. Cooperatives and small businesses are assisted through credit schemes to grow their operations using financial development institutions (FDIs) such as Ithala, to ensure sustainability. But before you register a cooperative, make sure that you and your partners have the same interests and a common goal. Make sure that you know and trust each other, that your product or service will be sustainable. Access to finances is often an obstacle for many women wanting to go into business and a lot has still to be done.
Financial literary, which includes saving, is at very low and almost insignificant levels in South Africa. I agree with Minister Pravin Gordhan that not enough has been done in the areas of financial education and economic literacy for South Africans. Become money smart and assist your sisters. Provincial Treasury is willing to assist with training. Be it workshops to inform you about cash flow management or explaining how tender and other procedures work or how to register on the database and how the supply chain of government works, we are there to support you.
Let’s get those green shoots growing! Let sisters do it for themselves!
Issued by: Department of Treasury, KwaZulu-Natal Provincial Government
10 October 2009
Source: Department of Treasury, KwaZulu-Natal Provincial Government
(http://www.kzntreasury.gov.za/)
