The bull-eish case for the SA economy

It is critical that South Africa guard against fiscal mismanagement, populist tendencies and an anti-business rhetoric, a leading economist has warned.

At an Old Mutual Investment Group seminar, its chief economist Rian le Roux, set out what he wittily referred to as the “bull-eish” case for South Africa. He said while the country is by no means out of the woods and various issues needed urgent attention, there are seven reasons to guard against “excessive pessimism”.

1. Constitutional democracy

South Africa is a constitutional democracy with powerful oversight mechanisms, a free media and vigorous public debate.

This is the country’s key strength, Le Roux argued.

It was demonstrated last year when the Constitutional Court ruled that president Jacob Zuma failed to uphold the Constitution when he didn’t adhere to the Public Protector’s ruling.

Le Roux said courts should ensure good governance, which is exactly what they are doing.

Parliament, which had been very bad at overseeing the executive, was also playing a better role as was demonstrated by the recent SABC hearings. The media played a vital role in highlighting issues, public debate was vigorous and during the municipal elections people clearly indicated that they were unhappy with the status quo, he said.

Institutional strength is the main reason South Africa still has an investment grade rating and why it would remain in place, he said.

2. Intensified focus on fixing what’s wrong

In a statement released by the ANC’s national executive committee early in January, it said: “When leaders and members of the ANC are corrupt and steal they are betraying the values of the ANC, the people and our country. We will not allow this! Corruption is corruption and whoever is found guilty thereof will pay the price.”

“So there is a focus on these things,” Le Roux said.

When students were crying out due to the escalating cost of tertiary education, there was a concerted effort to address the issue. Parliament has taken on the SABC and the SAA has a new board. While addressing challenges won’t be an easy task and issues won’t be resolved quickly, there are signs that it is happening, he said.

3. The economy has weathered the storm

Le Roux said despite the shocks the economy experienced, the level of real GDP has remained robust. Although the agriculture and mining sectors were particularly hard hit, sectors like tourism have performed well.

The economy had weathered the storm and is quite flexible, he added.

4. Fading shocks

Le Roux said a lot of the shocks the economy had experienced were fading.

Load shedding was finally over and commodity prices have bounced back. The dollar index of the four major commodities exports (gold, platinum, coal and iron ore) was up 30% from the bottom. The mining sector should perform a lot better and the labour environment was much more stable.

Le Roux said a big fear of ratings agencies during 2015 was that strikes would continue in 2016, but there was hardly any labour unrest.

He expected inflation to slow during the course of the year – largely driven by lower food inflation – and that interest rates might fall marginally in the second half of the year.

5. Underlying improvement quietly continues

Le Roux said over the past ten years, the percentage of income earners in the four lowest income bands (adjusted for inflation), has fallen from 50% to 20%.

Due to the weak economic situation, the trend has slowed over the last few years.

“The biggest fundamental problem in South Africa today is the economy is not growing. [South Africa has] got to get confidence back and get the economy growing. That solves a lot of problems.”

Le Roux said the number of individuals on the income tax register had increased by 3.5 million to roughly 19.1 million over the past three years. While a lot of these individuals fell below the tax threshold and didn’t pay personal income tax, the income base in the economy was spreading, which was an improvement. The number of companies registered for tax increased by one million to around 3.3 million, he said.

6. SA has a history of ‘can do’ and numerous success stories

Le Roux said automotive manufacturing in South Africa had been a great success story, particularly exports. Other examples of successful endeavours included renewable energy, specialised farming, tourism and Cape Town’s film industry.

7. SA’s potential is recognised by foreigners

Nobody said this better than a regular critic of South Africa, Peter Attard Montalto, an emerging markets economist at Nomura Securities in London, in a newspaper column last year, Le Roux said.

“There is a deep robustness in, and profound potential for the private sector in South Africa, with the right policy measures,” he wrote in Business Day.

With the right policy measures in South Africa, businesses would flourish. This was a key issue, Le Roux said.

BUT

He cautioned however that the dangers and risks have not passed.

“Now make no mistake, fiscal management is crucially important. If you throw fiscal conservatism out of the window, you capture National Treasury and you start to spend willy-nilly I can guarantee you all seven reasons I gave you will fly out of the window overnight.”

Le Roux said while CEOs and government had been engaging, he still detected a lot of tension. Policy uncertainty was worrying and the goal posts kept on shifting.

“Tackling unemployment, poverty and inequality is far easier when confidence is high and the economy is going.”

Foreigners have sold R180 billion of South African investments over the past 13 months, while South African companies have invested R250 billion outside the country in the last four years, he said.

“There is no confidence in the future of the economy, there is uncertainty about policy. We need to fix this.”

Brought to you by Moneyweb