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‘Policy uncertainty a tax on investment’

Sharp rise in NWU’s index following cabinet reshuffle.

JOHANNESBURG – A recovery in private investment and investor confidence is essential to South Africa’s economic growth recovery, academics from North West University’s (NWU’s) School of Business and Governance have warned.

“Policy uncertainty has become a tax on investment. To change this situation requires that policies should become clear, consistent, coherent and growth-oriented, and indisputably linked to the NDP [National Development Plan] and its programmes.”

The NWU’s Policy Uncertainty Index (PUI) reflected a sharp rise to an average index score of 51 in the first quarter of 2017 compared to 38.8 in the last quarter of 2016. An increase beyond the 50-level baseline points to heightened policy uncertainty (see movements in recent quarters below). High levels of policy uncertainty are associated with lower levels of investment, consumption and employment and may inhibit economic growth.


The sharp spike in the PUI in the first quarter was closely linked to the downside risks created by the cabinet reshuffle in which former finance minister Pravin Gordhan was replaced by Malusi Gigaba.

Prof Waldo Krugell of the NWU School of Economics says investors want to put their money to productive use. During periods of heightened uncertainty it becomes valuable to wait and see how events unfold. Although investors may not be disinvesting, they will consider their options.

“That is actually the worst part of uncertainty. It just extends decision-making where we should have had that money working in the South African economy as soon as possible.”

A wait-and-see attitude among investors is expensive for South Africa. The country wants investors to commit, but an uncertain environment is not conducive to investment commitments, Prof Raymond Parsons of the NWU School of Business and Governance, adds.

The International Monetary Fund (IMF) on Tuesday revised its projection for global growth in 2017 to 3.5% from an earlier 3.4%. Although South Africa’s economic growth for the year was projected at 0.8%, this was calculated prior to the cabinet reshuffle and subsequent downgrade to junk status. The country has been struggling to unlock its economic growth potential as a means to fight poverty, unemployment and inequality. Political uncertainty has remained high in the wake of Nenegate and structural reforms have been lacking.

Parsons says there is no reason for South Africa to hide behind the world economy for its failings.

“We must deal with our domestic factors, our domestic policies and minimise the uncertainty, which could arise from our domestic policies, not from the world economy.”

There is no doubt that the latest political developments have raised the downside risks in the South African economy, he says.

Although the market reaction to the cabinet reshuffle and ratings downgrade was fairly muted in relative terms, it was still a shock to the economy.

With regard to the implications for fiscal discipline, the next test will be the Medium-Term Budget Policy Statement, which will show whether there has been a fiscal shock under the new regime at National Treasury, Parsons says.

Although Gigaba has stressed that government policy would remain unchanged, his message has not been consistent. It also remains unclear what exactly government means when it refers to “radical economic transformation”.

Krugell says the term makes investors nervous. They don’t know what exactly it refers to and immediately evaluate whether a potential fixed investment could be under threat.

“It is a slow poison from the viewpoint of investors.”

Parsons says while the ANC documentation for its policy conference frequently refers to the NDP, it is not clear where the debate around radical economic transformation fits into the plan.

Despite its limitations the NDP gave business people and credit ratings agencies a sense of direction, but the debate around radical economic transformation added to the uncertainty. Stakeholders were looking for evidence that policies were being implemented consistently and clarification around what the new debate meant for commitments to the NDP.

“I think it just adds to the uncertainty at this point and cries out for more clarification.”

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“Policy uncertainty has become a tax on investment. To change this situation requires that policies should become clear, consistent, coherent and growth-oriented, and indisputably linked to the NDP [National Development Plan] and its programmes.”
Why is it so hard for ANC politicians to get this? International investors will invest where there are opportunities and certainty. Both have to be present. The investors do not “owe” SA anything. The ANC (and SA in general) must snap out of the victim mentality soon and stop blaming the world for the results of their own irrational behaviour.

Oh dear Malusi Gigupta. You best come home now from the USA, tell everyone you have been recalled and not expelled by the investors, so you can tell your boss that he has messed up big time and you have messed in your pants and have to get back quickly before the Western Capitalists throw you out. But you are always welcome in Russia, Brazil and India – if they have any faith in you. We in South Africa don’t.

As far as Moody’s is concerned, they are going to show you a toffee. A well deserved one. Get you speech ready to explain the Moody’s downgrade when it comes so you won’t be caught short.

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