Economic policies and market regulations set by the government can have a profound impact on companies’ competitiveness and profitability.
In MMI Holdings’ view, the political backdrop is key in setting policies and reforms. An unstable political environment can force the government to make less business-friendly decisions that jeopardise economic growth in the long run. As such, government decisions on Budget issues need to balance revenue generation with creating a business environment that nurtures growth.
In this light, companies are likely to be disappointed if these eight trends emerge in Finance Minister Pravin Gordhan's national Budget to be tabled this week, on February 22:
1. Irresponsible management of SA’s finances
Mismanagement and a lack of accountability of government finances raise a red flag for rating agencies. Given that South Africa is teetering on the brink of sub-investment-grade status, public funds must be managed and spent responsibly and transparently. If wasteful and fruitless expenditure continues to rise, it may tarnish South Africa’s creditworthiness, leading to negative ratings action. This, in turn, would raise funding costs for South African businesses.
2. Increased government intervention without broader consultation
There have been government utterances on the potential for a state mining company and a state bank. Moreover, land redistribution policies cloud the agricultural landscape. If not consulted upon widely, increased government intervention in key sectors of the economy could decrease local and foreign investment, lower employment growth and stifle innovation.
3. More red tape
Non-essential procedures, paperwork, licences and regulations add to the cost of dealing with the government. Creating a more enabling business environment, by reducing compliance costs for South African companies, will encourage investment in capital and labour. According to the World Bank, South Africa ranks 74th out of 190 countries on the Ease of Doing Business Indicator, calibrated in June 2016. On the underlying measures, South Africa ranks particularly poorly on the ease of trading across borders (139th), starting a business (131st) and getting electricity (111th).
4. Insufficient support for small businesses
Small and medium-sized enterprises should be considered a core segment of economic development in South Africa, given their ability to create employment opportunities and redistribute income. Onerous tax burdens, insufficient administrative support and a lack of entrepreneurial education could restrain the industry.
5. Paring back government infrastructure plans
Businesses are more reluctant to invest in an economy without modern infrastructure. Critical roads, electricity and transport infrastructure as well as supportive infrastructure in the telecommunications sector are vital to improve access to markets.
6. Disincentivising innovation
The Human Sciences Research Council found South Africa spent 0.73% of its gross domestic product (GDP) on research and development in 2013-14, the same percentage as in 2012-13 and 2011-12. This leaves the country on the back foot when competing globally. The average spend (as a share of GDP) for countries within the Organisation for Economic Cooperation and Development is closer to 2.5%.
7. Failure to address shortfalls in educational outcomes
Investing in human capital complements investments and policies to boost productivity and overall economic progress. A failure to develop a framework to create job opportunities could lead to brain drain and ultimately result in social unrest, which would lower business confidence and create an unstable investment climate for businesses.
8. Hampered development of special economic zones
Some of the major challenges facing special economic zones, highlighted by the Department of Trade and Industry, include insufficient organisation and planning, dependence on government funding, a lack of coordination among government agencies, and a failure to adequately promote investment opportunities.
Businesses in special economic zones are able to generate large numbers of employment in labour-intensive industries. As such, more flexibility in legal conditions governing employment are critical for their success. Moreover, easing the rigidity in the public-private partnership structure for special economic zones has garnered success internationally and could lead to progress on the programme in South Africa.
This article was sponsored by MMI Holdings.
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