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Ramaphosa's plan could boost growth to 4.5%

Apr 22 2018 05:55
Justin Brown

The South African economy could achieve growth of between 4% and 4.5% from 2020 onwards if President Cyril Ramaphosa achieves his target of attracting R1.2 trillion in new investment over the next five years.

This is according to calculations by Nedbank economist Dennis Dykes.

In addition, he said, an infusion of R1.2 trillion in extra private sector investment could create between 1 million and 1.5 million jobs and possibly more if appropriate economic changes were made.

Dykes based his hypothetical calculations on R50 billion of extra private sector investment this year, followed by R120 billion next year, R220 billion in 2020, R340 billion in 2021 and R470 billion in 2022.

Last year, private sector gross fixed capital formation was R549 billion – up from R537 billion, according to the latest SA Reserve Bank quarterly bulletin.

However, in real 2010 prices, which remove the effect of inflation, private sector gross fixed capital formation hasn’t moved much – it was R349 billion in 2009 and R389 billion last year.

Achieving the R1.2 trillion target could see private sector gross fixed capital formation grow by 12% to 13% a year in real terms. This could be supported by government gross fixed capital formation, which could grow in real terms by 3% a year, Dykes said.

Jeffrey Schultz, an economist at BNP Paribas, said that, were the target to be achieved, it would have a positive effect on the country’s balance of payments and would most likely cause the rand to strengthen.

TARGET COULD EASILY BE THWARTED

However, Ramaphosa’s target could easily be thwarted if he doesn’t speedily deal with key policy issues such as the Mining Charter and the expropriation of land without compensation.

Schultz said that bringing in R1.2 trillion in new investment over five years was an “extremely ambitious target”.

“We have heard a lot of robust and impressive sounding announcements from politicians – so it maybe too early to get too excited,” he added.

On the other hand, Ramaphosa has ticked a number of boxes in a short space of time, which shows that he means business.

“We should watch this space,” said Schultz.

Dykes said: “For the target to be achieved, there needs to be a very quick lift off.”

Dykes added that uncertainty around the result of next year’s national elections could lead to investors delaying investment in the country as they wait to see what happens in the political landscape.

“There is a lot of excess capacity in the local economy and this needs to be taken up before businesses start to expand more rapidly,” he added.

Schultz said that the key issues that needed to be addressed in the local economy to achieve Ramaphosa’s investment target included the right policies – and that the right policies get implemented properly.

The failed policies over the past decade under former president Jacob Zuma had seen dismal foreign direct investment, Schultz said.

The Mining Charter has to be resolved after being up in the air for a number of years, and the issue of land expropriation without compensation also needs to be dealt with.

It was also critical that investment in the country boosted growth and resulted in job creation, Schultz added.

Dykes said that an improvement in local policy certainty, particularly in the mining sector, as well as a more friendly attitude towards business would be necessary to foster the increase in capital investment.

There was a need for a “solid” Mining Charter, he added.

EXPROPRIATION A RISK

However, the drive to amend the Constitution to allow for the expropriation of land without compensation was already creating uncertainty and needed to be clarified quickly to avoid unnecessary damage to the investment effort and consequently to the local economy and especially to the agricultural sector, he added.

Ramaphosa was in London this week to attend the Commonwealth Summit when, according to Bloomberg, he said: “We won’t damage the economy. The land drive should not lead to a reduction in agricultural production or endanger food production.”

As part of his plan to attract R1.2 trillion to the country, Ramaphosa may well offer investors enticing deals.

Ramaphosa told Bloomberg: “We will have well-crafted incentives that will attract people. Some of them may well be tax incentives or general industrial incentives.”

Dykes said that achieving the target of R1.2 trillion in extra investment was on the “outer bounds of what you can expect”, but it could happen.

Ramaphosa announced that he would hold an investment conference in August or September.

“The investment conference, which will involve domestic and international investors in equal measure, is not intended merely as a forum to discuss the investment climate,” he said.

“Through the conference, we are aiming to generate at least $100 billion [R1.2 trillion] in new investments over the next five years. Given the current rates of investment, this is an ambitious but realisable target that will provide a significant boost to our economy.”

Dykes said South Africa’s Renewable Energy Independent Power Producer Procurement Programme was an “excellent example” of a programme that attracted investment to SA and that this model could be replicated in other areas.

The initial renewable energy programme is estimated to have attracted R191 billion, while Energy Minister Jeff Radebe earlier this month signed further contracts with renewable power producers that will result in R56 billion in extra investment. These investments have also created hundreds of jobs.

Ramaphosa said that, in 2008, fixed investment was at 24% of GDP, but this fell to 19% last year.

Dykes said that achieving the target of R1.2 trillion in new investment could see total local fixed investment climb to about 25% of GDP.

Ramaphosa said: “The National Development Plan says we need to increase this to at least 30% of GDP by 2030. Foreign direct investment declined from about R76 billion in 2008 to just R17.6 billion last year.”

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