Patrick Cairns, Moneyweb
4 minute read
5 Aug 2019
9:09 am

Politics essential in restoring confidence in SA’s economic prospects

Patrick Cairns, Moneyweb

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

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

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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