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SA at five minutes to midnight on poor policy choices

Mar 22 2016 13:48
Daniel Silke

Cape Town - South Africa faces its toughest political and economic year since 1994. Both global and domestic factors are conspiring to test the country’s policy makers in a last-ditch effort to kickstart the flagging economy and also stave off the much-dreaded ratings downgrade.

Clearly, not all of South Africa’s current crop of problems are homemade. Critical shifts in China’s economy, moving from a more production-driven course to boosting consumption, will be messy. This generational shift comes amid flagging growth rates now expected at 6.5% for 2016 – a significant decline over previous years.

Already, those developing markets - particularly in Africa – which have relied on the export of minerals are seeing their growth rates falter. South Africa’s key export commodities, among them platinum, coal and iron ore, have all fallen sharply. As a result, the mining sector's contribution to GDP has declined. The country is not alone at feeling the pains of lower commodity prices – and just like Zambia and Angola’s currencies, the rand has been severely hit.

The precipitous fall in oil prices, together with a more volatile China, presents a near perfect storm for South Africa in terms of external risks to the economy.

Add to this other global risks - including flagging emerging market growth, a decline in the fortunes of key Brics members like Russia and Brazil, and rising US interest rates - and you have an unstable global picture playing havoc with many developing nations.

However, South Africa’s domestic problems are also as a result of a disappointing underperformance of the economy that has largely failed to keep pace with global economic trends. Our GDP today is weaker than the global average, at least three times weaker than that of sub-Saharan Africa and remains only a shadow of East Asia and the emerging pacific nations.

Unemployment rates of at least 25% have barely moved since 1994 and remain substantially in excess of other OECD and Brics nations.

Ultimately, a series of ‘own goals’ has also contributed to the current economic malaise. Poor policy choices are at the heart of creating a climate of investor suspicion and alarm.

From the private security bill to the Protection of Investment Bill to the Expropriation Bill, ownership and tenure interventions from government create doubt among both foreign and domestic investors.

As a result, foreign direct investment into the country in 2015 declined dramatically and in excess of the broader African FDI decline.

In addition, the relationship between the state, private sector and labour has been severely strained for many years. The breakdown in trust between these three key pillars of the nation is also at the heart of our lacklustre growth. South Africa is now ranked 140 out of 140 nations surveyed for a working labour relations regime in the World Economic Forum’s Global Competitive Index.

Nenegate adds to misery

With both external and domestic issues contributing to low growth and flagging confidence, recent political events add to the misery. The Nhanhla Nene debacle in December not only cost South Africa in terms of the currency collapse and a rising cost of credit, it also severely damaged confidence and all-important sentiment towards the country.

It is therefore not surprising that amid the unstable global environment, the last decade of poor policy formulation and execution of state efficiency has finally caught up with the country.

Since 1994, politics has been the driving factor behind the domestic economy. Redress, transformation and an ever-increasing role for the state has chiefly been its characteristics.

Politically motivated (and ideological) governance has also contributed to severe inefficiencies – notably in educational outcomes and in the role of state-owned enterprises.

So, as the economy falters dangerously towards recessionary territory and the deep inefficiencies of SOE governance become known, it is once again economics that looks set to take centre-stage.

With literally five minutes to midnight, Finance Minister Pravin Gordhan has been attempting to restore the necessary confidence to undo years of poor policy choices and stave off the Moody’s ratings downgrade that could be a forerunner for S&P and Fitch to re-rate the country as ‘junk’.

This is a critical period as Moody’s has starkly stated what needs to change - among others, a review of loss-making SOEs; a review of legislative policy; the management of government debt; a curtailment of overspend; and extreme fiscal prudence. All these demands have profound political implications on the African National Congress in their ability to dispense patronage and apply their ideology.

Any ratings downgrade will hit the currency - and inflation with it. But even more at risk is the cost of borrowings and our ability to service our debt – already set to rise by R15bn over the next two years. Debt service costs are now the country’s fastest growing item of expenditure, bigger than health and education costs.

So the country faces a tense period. Pravin Gordhan and the ANC reformers are set to battle those who prefer the status quo of ‘big man’ politics. President Jacob Zuma might have received an endorsement from his own National Executive Committee after the Gupta revelations of state capture, but his hands may be tied in his ability to wield power.

Still, the country faces political instability as the old habits of cronyism and patronage politics are countered by those who wish to rescue the ailing economy.

There will be no ‘business as usual’ this year in South Africa. All aspects of the body-politic are now engaged in either a fight for political survival or to kickstart a broader turnaround.

It’s fasten-your-seatbelt stuff – but at the same time, this confrontation with reality is highly necessary and the skeletons being flushed out into the open are certainly better dealt with in public rather than behind closed doors.

When your back is against the wall economically, maybe – just maybe – necessary change will come.

* Daniel Silke is director of the Political Futures Consultancy and is a noted keynote speaker and commentator. Views expressed are his own. Follow him on Twitter at @DanielSilke or visit his website.

sa economy  |  downgrades
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