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Creating the environment for a recovery in South Africa

Sentiment matters.
Driving confidence is the cheapest form of stimulus – if people are more confident, consumers will consume and businesses will invest. Image: Moneyweb

When the government of national unity took office in 1994, the South African economy was in a precarious state. The country’s debt to GDP ratio was close to 50%, economic growth over the past five years had averaged just 0.2%, and inflation had been above 10% for most of the previous 15 years.

There was broad concern about South Africa’s economic prospects. Confidence was low.

However, over the following five years, the country staged a remarkable recovery. Government debt was controlled, inflation was managed downwards and economic growth averaged 2.5%.

This was a pertinent example of just how much impact a change in sentiment can have. When it became clear that the Mandela-led government was going to be largely prudent in its approach to economic policy, business and consumer confidence shot up, based on the good news story of the peaceful transition to democracy and the new opportunities being created.

How things have changed

Since 2010, quite the opposite has happened. The corruption and mismanagement that characterised the Zuma presidency sucked confidence out of the economy, and South Africa’s GDP growth has stagnated.

Source: BER, Momentum Investments

For Herman van Papendorp, the head of investment research and asset allocation at Momentum Investments, this shows just how critical the political environment is to South Africa’s economic prospects.

“Politics is very important in South Africa as a driver of confidence, and confidence drives economic performance,” he says. “The reason why South Africa has been stuck in this low growth environment is a lack of confidence from consumers, from business, and from investors because of what the political environment has looked like.”

This is one of the key challenges that Cyril Ramaphosa’s government now faces. It has to restore faith in the country’s ability to prosper.

“At the beginning of the Zuma era, less than 40% of businesses saw the political and policy environment as a negative for their investment plans,” Van Papendorp explains. “By the back end of 2017 – the end of the Zuma presidency – 90% of businesses said they see policy uncertainty and political instability as the main reason for not putting money into this economy.”

Source: BER, Momentum Investments

“In order for us to really get growth going, we need a sustainable recovery in confidence and we need to take away the worries that business has about the political and policy environment,” he adds.

Where to start

This challenge, however, is also an opportunity because Van Papendorp believes there are some “easy wins” for the government that will demonstrate its commitment to making it easier for businesses to operate in SA. Taking these steps will also encourage more confidence in its ability to deliver an attractive environment.

The first of those is easing visa regulations.

“That is just the stroke of a pen,” says Van Papendorp. “Then companies that need skills that are not available in South Africa can import those skills.”

He adds that if government eases visa regulations for tourists at the same time, that also has the potential to boost growth.

“Tourism is not just a significant part of the economy, it’s also a very labour intensive part,” Van Papendorp points out. “You would see significant employment creation if you eased visa regulations.”

The second ‘easy win’ is licensing new broadband spectrum, which will bring down communication costs. A third is reducing port and rail charges.

“South Africa’s port charges are double those of the developed world, and it takes three times longer to clear customs here,” says Van Papendorp. “That is obviously to the detriment of doing business.”

There should be little political pushback associated with most of these steps.

The benefits of demonstrating a genuine intent to support the role of business in the economy would however be substantial.

“In order to get a revival of growth, we need to improve confidence,” Van Papendorp argues. “That is the main variable that Ramaphosa has to work with, because driving confidence is the cheapest form of stimulus in the economy. You don’t have to cut rates, and you don’t have to spend money as a government. If people are more confident, consumers will consume and businesses will invest.”

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How depressing. We can do tons with just the stroke of a pen.

But we don’t, and we won’t. Why?

This has to be a level of stupidity that one simply cannot comprehend; and yet, when you look around one sees this same stupidity everywhere.

RW Johnson said it best when he pointed out that governments persue policies for which there are no discernible winners.

In an international competition of political own goals south Africa would definitely be in the top three, probably behind only Zimbabwe and Venezuela.

South Africa’s growth post 94 can be attributed to 3 major international factors

* Opening up economy to global markets and sanctions ending
* China’s demand for commodities, effectively doubling/tripling value of our exports
* Strong global growth in last 25 years

Low hanging fruit now plucked, our competitive advantage has been eroded by international competitors who we can’t keep up with.

Our labor is not competitive vs Asia, infrastructure & ports can’t compete globally and BEE, EWC are the final nails in the coffin.

So only sustainable industries are tourism, agriculture & natural resources, yet no policy on how to lower the business costs of these. And government has made it clear through inaction that they have no idea nor interest on how to get started.

Sentiment merely changes when businesses start making money (local or international causes), then investment follows.

At least the coming SA train wreck is being well documented and analyzed!

A huge difference between 1994 and today is that in 1994, the civil service, local government and state owned enterprises were largely intact. A turnaround for today’s economy is an entirely different proposition.

Some fair points Patrick but surely as a global investor you want:
1. Rule of law-civil and criminal.
2. SOEs functioning, solvent and managed.
3. Safety for international employees.
4. A stable, capable, reasonable labour force and unions.
5. Minimal exchange control hassles.
6. A favorable income tax environment.
7. Ease of doing business

How can we-SA-compete with a Vietnam, South Korea, Indonesia etc? We are s far behind in every aspect that investors keep doing what they have previously-trade in our debt to make a quick buck but avoid any long term investment at all.

Even that value destroying Patel must see this after a while.

and 8.Recognition of proprietary rights

Hmmm …

One now gets censored and deleted by MW for daring to mention that Economists and politicians don’t want to discuss the impact of dysfunctional families and the lack of a national birth-control policy!

And this in a quite innocuous comment.

Whatever happened to a robust debate, Ryk?

The first paragraph say’s it all.

The apartheid government did way better under full international sanctions than the current lot.

I wonder what the difference could be?

In 1994 it was easy to re-structure, the affected people were from the previous government.

It seems that the gravy trainers are still in control, NPA is being sidelined by all the attention on the Public Detractor.

City of Johannesburg surely has many easy NPA wins. Most employers set key performance areas for their staff, so where is the problem?

So we must have faith that somehow the ANC will eventually get something right.

contempt of proprietary rights… expropriation without compensation……this government is not serious about job creation or economic growth!

The lowest hanging fruit to address is to get the NPA performing with a dik spoed, whilst the other opportunities are pursued simultaneously by the respective carry on with its priorities.

Let’s be honest, the vast majority of our problems are self-inflicted and due to the fact that government cannot do anything right. The private sector can only do so much. When we are constantly being undermined and hamstrung by a government that cannot do even the simplest things right, and indeed quite often places needless obstructions and red tape in the way of potentially successful sectors (stupid tourist visa restrictions, obstructing the IPPP) what chance do we have?

BEE and corruption have decimated the SA economy. Killed it.

End of comments.





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