South Africa’s problems run a lot deeper than a lack of confidence, which explains why economic growth has remained lacklustre despite a stronger world economy and constructive changes on the local political front, an economist has argued.
“The change in the political leadership has certainly supported confidence, but it isn’t just confidence that is holding us back,” senior economist Nicky Weimar told delegates at the Nedgroup Investments Summit in Sandton on Thursday (August 2).
At the beginning of 2018, some economists said the local economy could grow more than 2% this year, but growth has continued to disappoint despite a supportive global backdrop. Forecasts now put real GDP growth closer to 1%. And while commentators referred to the positive sentiment that gripped the country in the wake of president Cyril Ramaphosa’s election as “Ramaphoria”, the narrative has changed to “Ramapausia”, highlighting a step change in tone.
Weimar said South African businesses face very real and tangible obstacles.
Firstly, they have to rely on a public sector that has been hollowed out by state capture and corruption.
“The cost of state capture and corruption is absolutely staggering … and we have not suddenly stopped paying for corruption just because we’ve had a change in political leadership.”
Weimar said cleaning up a mess of this scale imposes significant costs on businesses and households in the form of higher taxes, cuts in government spending and the rising cost of production due to higher electricity tariffs and other state infrastructure costs.
“Ultimately, it is a good thing that we are doing. It is good to root out corruption. It is good to restore fiscal discipline … but in the short term they are painful.
“In the short term they actually hurt economic growth initially, because everybody is now asked to go and foot the bill.”
This imposes a significant cost on the private sector, she added.
Secondly, most South African businesses operate in a highly uncertain policy, legislative and regulatory environment, which is cumbersome and costly.
Weimar said the country continually entertains ideas to the radical left of the spectrum and the fret of these ideas materialising in economic policy adds to the risk of investment and expansion in South Africa.
“The policy and legislative environment remains incredibly unfavourable and it just fuels and inflates the risk of investing in South Africa.”
Businesses also operate in a hostile environment. The labour market remains dysfunctional, wage growth outstrips productivity growth in most industries, and strikes are a frequent occurrence, which adds to production cost. Businesses also have to rely on expensive and unreliable economic infrastructure provided by inefficient state-owned enterprises, Weimar added.
Against this background, many local exporters – particularly in the mining and manufacturing sectors – have over the past 10 years lost their ability to compete with other countries, which don’t have these challenges. This is why the mining and manufacturing sectors are taking so long to respond to a favourable global environment.
Weimar said the new political leadership has not really done anything to materially improve the investment environment.
“In fact, I would say that uncertainty and the associated risk created by uncertainty have probably increased mainly because the ANC is pondering things like expropriation without compensation and the universal rollout of the National Health Insurance Programme.”
Against this background, it’s no surprise that fixed investment activity remains low. Moreover, private sector job creation has remained flat.
While public sector job creation exploded during former president Jacob Zuma’s tenure and supported consumption in the economy, it was unsustainable. During the first quarter of 2018, consumer disposable income showed virtually no growth and consumer spending slowed.
“So that is another reason why this economy has been so weak and so slow to respond to what is essentially a favourable global environment.”
Weimar said that if South Africa wants to move to a materially faster economic growth rate that supports job creation, it will have to start addressing the long list of fiscal and structural constraints that are discouraging fixed investment.
But structural reforms are politically unpalatable as they almost always require significant short-term trade-offs and costs.
“We believe that the appetite in South Africa to bear these short-term costs, we don’t think it is there … As a result of that, we don’t expect significant progress with structural reform – especially not ahead of next year’s general election.”
Weimar said that even after the election it will be quite a battle to eke out gains on the structural front, which means economic growth will probably be modest over the medium term.