If there is an economic consensus among private sector economists, it’s that President Cyril Ramaphosa must make concrete progress in excising state corruption and implementing pro-growth reforms to keep fuelling business and investor confidence.
The big question is whether Ramaphosa is going to be forced to compromise on policy reform to the same extent that he was forced to compromise on his cabinet. If that happens, the economy will not take off. And it must take off if SA is to start making inroads on unemployment, poverty and inequality.
With a population growth rate of just under 1.7% and extensive youth unemployment muddling along with low or stagnant growth of 2% or less, the average person’s quality of life will barely improve. Social and fiscal pressures will mount.
There are significant dangers in this. It is an environment that breeds populism and destroys confidence, and this is something SA must avoid at all costs. The good news is that in the short term there is every sign that SA will emerge from its low-growth trap quite quickly as confidence returns, pent-up investment and consumer spending is unleashed, and the economy emerges from a cyclical trough.
Treasury is expecting real GDP to come in at 1.5% this year (previously 1.2%) and to rise steadily to 2.1% by 2020. This is roughly in line with the prevailing consensus, though treasury is "optimistic" that the figure could be exceeded if government is able to maintain its reform momentum.
Treasury’s best-case scenario is that growth could top 2% this year if confidence and investment can be increased further.
In a new report, "Investment Decisions: Why SA and Why Now?" PwC economists set out five growth scenarios for SA. The most likely is that Ramaphosa will manage to enact the necessary changes to accelerate economic growth to 3% by 2022, but that further outperformance will remain elusive.
The report notes that despite several years of economic and political decline, SA has retained many strong features that make it "a promising investment destination with a bright future". These include SA’s openness to foreign direct investment, the country’s status as a gateway into Africa, "independent and prudent" monetary policy, sophisticated telecommunications and financial services sectors, a diversified economy, the absence of capital controls, and the existence of special economic zones (SEZs), in which tax and other incentives apply.
The report concedes that SA has in the past struggled to develop SEZs that significantly contribute to economic growth. Recently, however, China’s ambassador to SA, Lin Songtian, referred to the Coega SEZ as the best in Africa. It registered eight new investors in 2017 and 16 in 2016, which together contributed almost R12bn in new investment.
According to the World Economic Forum’s 2017/2018 "Global Competitiveness Report", SA ranks among the top 25% of countries for the strength of investor protection; its auditing and reporting standards; the efficiency of its legal framework in settling disputes; the protection afforded to minority shareholders; the availability of financial services; its capacity for innovation; and the quality of its air-transport infrastructure.
Speaking at Deloitte’s Gearing for Growth seminar in Johannesburg last week, Singapore-based economist Manu Bhaskaran, CEO of Centennial Asia Advisors, noted that while SA’s economy remained resilient from 1995 to 2015, progress slowed slightly over the past decade.
SA dropped from a ranking of 25th to 33rd out of 101 countries between 1995 and 2016 on on Centennial’s Economic Resilience Framework as the country’s resilience score remained stubbornly below 100 index points. It inched upwards from 96.9 to just 97.9 over the period.
Over this 21-year period, government’s effectiveness showed the most dramatic deterioration, falling by 10 index points, from 97.4 to 87.4.
Bhaskaran said the effectiveness of a country’s civil service matters in determining its economic resilience, as the combination of political capacity and strong governance results in a more efficient economy.
One area in which SA improved significantly was in its conduct of monetary policy and the credibility of its central bank. Its score climbed from 95.1 in 1995 to 100.5 in 2016.
Unless the private sector is unleashed as the engine for growth, SA is unlikely to raise the growth rate much above 4%
"As the only adult in the room over the past few years, the central bank has provided a steady anchor in an environment of surprise cabinet reshuffles, foreign flows, credit downgrades, instability at national treasury and mismanagement of key state-owned enterprises [SOEs]," Investec Asset Management’s Peter Kent and Malcolm Charles say in a recent research note.
Bhaskaran suggests four ways in which to increase an economy’s resilience.
First, ensure that there is space to conduct countercyclical macroeconomic policies so that when crises hit, government is able to reduce or at least smooth their negative impact.
For example, the fact that then finance minister Trevor Manuel posted small budget surpluses in the run-up to the global financial crisis enabled government to stimulate growth by raising spending when the crisis hit.
Second, he suggests that countries manage their external vulnerabilities to instil confidence in their currency and external accounts. This could involve accumulating foreign reserves and maintaining a low external deficit, among other things.
Third, there should be strong financial oversight to prevent the build-up of systemic risk. This should include ensuring that all banks are well-capitalised.
And, fourth, resilient economies tend to be diversified. This means there are multiple growth engines to rely on, should one fail.
Bhaskaran stressed that to get growth going after an economic or financial crisis, a country’s capacity to undertake reform, kick-start investment, and promote innovation and entrepreneurship is key. He would also streamline the bureaucracy and cut red tape to raise the economy’s competitiveness and, in so doing, improve the business and investment climate.
A less intrusive but more effective government will promote growth
— What it means:
The PwC economists’ five growth scenarios hinge largely on the extent to which Ramaphosa is able to implement the reforms set out in his New Deal.
The economists attach a mere 5% probability to Scenario 1, a "Mouldy Mess". Here, the ANC remains divided, which makes it difficult for Ramaphosa to push through reforms. As a result the economy performs so poorly that the ANC loses its outright majority in the 2019 elections. After that SA is run by an unstable coalition that fails to deliver. Growth and jobs disappoint, business and consumer confidence wane and SA gets downgraded deeper into junk territory.
In Scenario 2, "Coming up Short" (a 25% probability), Ramaphosa’s New Deal remains stillborn as the ANC tacks left towards populist policies to remain in power. Government corruption continues unabated, which results in disappointing growth, fiscal slippage and further credit downgrades.
In Scenario 3, "#Ramaprogress" (a 50% probability), the ANC’s renewed focus on job creation, economic growth and investment pays dividends. Financially troubled SOEs are turned around but less progress is made in fixing the deep-seated problems in education.
Meanwhile high energy and labour costs, competition from Asian rivals and slow progress in implementing free-trade agreements on the African continent continue to place pressure on manufacturing production.
But better co-operation between business, government and labour help to get the growth rate up to 2% by 2020 and 3% by 2022, which supports the fiscus and spares SA further credit-rating downgrades.
In Scenario 4, the "New Deal" (a 20% probability), the growth rate recovers to 3% in 2020 and climbs above 4% by 2022 on much better governance, rising investment and a strong rebound in confidence. This solves SA’s fiscal problems and the country recovers its investment-grade credit rating.
In Scenario 5, "Prosperity" (a 5% probability), SA achieves economic growth of more than 4.5%/year from 2022 on accelerated labour market liberalisation and economic reforms that allow a bigger role for the private sector in the economy, including the outright privatisation of some SOEs.
In short, the report suggests that unless the private sector is unleashed as the engine for growth, SA is unlikely to raise the growth rate much above 4%.
Prof Brian Kantor, chief economist at Investec Wealth & Investment, appears to agree. Speaking at a recent event in Cape Town, he conceded that while Ramaphosa’s "new dawn" does promise better governance and less corruption, the growth agenda remains overly reliant on government.
He believes government’s current economic policy mix of high taxes and spending (implying an increasingly interventionist government) has contributed to the debilitating, slow growth of recent years.
"At this point," he said, "we need to simplify, privatise and let the invisible hand [of the market] do its work."
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.