Daniel Silke: Why SA's economic reform is on pause - again | Fin24
 
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Daniel Silke: Why SA's economic reform is on pause - again

Dec 19 2018 07:00
Daniel Silke

South Africa’s economic underperformance – when assessed against both African and international economies – is well documented. The country has consistently lagged behind continental and developing market GDP levels since the end of the credit crunch in 2008. It has also suffered from a severe contraction in foreign direct investment over a similar period.

Whilst much of this non-performance and decline is due to crippling domestic issues around both governance and policy failure, South Africa has also run up against a tide of shifting global dynamics and has largely been incapable of implementing any global strategy to combat this.

When you’re too busy fighting domestic ideological battles, not to mention becoming mired in state-capture issues, you have little ability to extend your gaze beyond your own navel.

While the Ramaphosa administration offers some hope of a future reversal of this depressing malaise, there remain far too many policy uncertainties to kick-start adequate growth. Yes, the country can keep itself about the recessionary red-line for 2019, but growth between 1%-2% will mean another year of underperformance – albeit at moderately better levels than 2018.

Policy uncertainty remains at the heart of depressed growth levels. On critical issues such as land reform (expropriation), there will be little clarity until the exact wording of the proposed constitutional amendment is known. And even then, possible legal and constitutional court challenges can further fudge real clarity. Lack of clarity means investor suspicions and declining activity in this sector – not something the country can afford.

On the new mining charter, an equally anemic response to the revised provisions are likely to result in very muted inward investments in this sector. With substantial falls in mining production in recent years (and related job losses), the industry is shifting to new metals outside of the South African jurisdiction. Onerous ownership conditions are likely to prevent any real revival and with it, the chance to elevate mining away from its ‘twilight’ status.

Without a real breakthrough in incentivising domestic manufacturing – utilising both tax and wage breaks for employers – this declining sector also is unlikely to show sufficient green shoots to alleviate chronic unemployment. Whilst investment corridors and EPZs can significantly attract investment, more ‘radical’ reforms away from the ANC’s constricting economic policies will be required.

Stranglehold

Similarly, unless government’s emerging energy policy releases Eskom’s stranglehold of power provision and integrates independent power producers and green initiatives, higher electricity prices and crippling bureaucratic deficiencies will be an impediment to large-scale Foreign Direct Investment (FDI) and will retard any move towards the industries of the looming fourth industrial revolution.

Lastly, flagging consumption expenditure is affecting a broad range of service industries – from tourism to retail. Although too early in the season to assess the effects of a sluggish domestic economy on these sectors, anecdotal evidence points to a very soft Christmas trade across the board. The danger of further tax hikes to cover increasing government debt – and possible further guarantees to Eskom – also will delay a rebound in economic performance.

These realities are likely, therefore, to keep South Africa trundling long without any real spurt in growth and job-creation opportunities. And a May general election will only serve to delay, by about six months, any potential reform in any of these areas – and that in itself is dependent on the nature of the ANC majority and the prevailing internal cohesion of the governing party come mid-year.

South Africa’s best-case scenario, therefore – in the light of this reality-check – is for its political leaders to find courage after the election. If they do, there might be some leverage to reform aspects of the labour market and relinquish some state control over SOEs.

New brooms

Given that new political brooms of Ramaphosa, Gordhan and Mboweni (among others) are keen to sweep in governance reforms, it will be the additional hard and tough ideological barriers that will require real political daring in the post-June period.

Ultimately, the country will be waiting to see whether Ramaphosa gets a mandate for change. If the new president is serious about this, he had better prepare his electorate for some tough choices when it comes to tweaking the ANC’s historic, more quasi-socialist approach to doing business.

Reality suggests, though, at election time, that politicians are still more likely to obfuscate than offer clarity on the change-of-course required.

With key structural reforms needed, the ANC is more likely to be running scared of openly taking these issues on the campaign trail and will rather return to the well-worn (and politically safer) themes of inequality and redress rather than explain with complete transparency the hard choices and policy shifts required.

South Africans should therefore brace themselves for an election campaign that will delay key decision-making by at least half-a-year if not longer. And then, tough choices will only be forthcoming if the vote result allows it.

In the interim, the country will have to rely on external factors beyond its immediate control for some modicum of economic improvement. A softer rise of US interest rates can help. Even slower global growth can make emerging markets a little more attractive. With choppy US markets and a possible economic slowdown in the EU – not to mention Brexit uncertainty – investors might well be a little more risk-on towards South Africa in 2019.

Policy reform will continue to be messy for the country over the entire election period. It is therefore likely to delay a real domestic up-tick based upon sound fundamentals. Once again, South Africa is therefore likely to rely on external global forces to direct her economic fortunes – at least in the short-term.

daniel silke  |  economy
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