South Africa’s economy turns corner, but big reforms still needed: Katzenellenbogen
Key topics:
S&P upgrade and end of power cuts lift economic confidence in SA
Treasury projects modest 1.2% growth despite positive reforms
Slow, partial reforms limit growth; privatisation and BEE changes needed
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There has been a spate of good news on the South African economy. But much faster economic growth and large numbers of new jobs are not yet evident.
A boost of confidence was the result of an upgrade out of junk status from the credit rating agency Standard and Poor (S&P) last week, improved government finances, and the end to serious power cuts and rail and port bottlenecks.
It is a guessing game to try to predict when the positive impact of reforms will boost economic growth, but for the moment, we are still underperforming. The Treasury only expects growth of 1.2 percent in 2025, which is more than double last year’s growth. However, this will be well under the forecast for world growth of 3.2 percent. Forecast growth for next year is still under our population growth of 1.3 percent, and therefore on a per capita basis, we are still in decline.
Growth and job creation are unlikely to surprise us soon, but the change of sentiment is tangible.
“After a decade of decline, South Africa has turned the corner,” declared Adi Enthoven, the Hollard Group Chair, last week in a speech at Stellenbosch University. Enthoven is also involved with other bosses through Business For South Africa in advising the government on how to turn the country around.
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If all goes well, Enthoven expects “a virtuous cycle of confidence and investment and accelerating economic activity that will drive prosperity for decades to come.”
Are the prophets of doom who repeat the impediments to growth with boring regularity about to be proved wrong?
The stamp of approval for much of the good news came with the upgrade from S&P last week. That lays the basis for a lowering of borrowing costs and helps reduce the debt burden.
Investors have liked the idea of the government of national unity. They have also noticed the end to power cuts, and the easing of bottlenecks at ports and on the railways. A few weeks ago, the grey-listing by an international body for laxity on money laundering and terrorist financing was lifted. That helps eliminate a red flag for many investors.
Widely welcomed
Last week’s Medium Term Budget Policy Statement, which outlines plans for Budgets over the next three years, was widely welcomed by the markets. Public debt is scheduled to peak soon, and if debt service is not taken into consideration, we will be running a surplus. The Treasury is getting a grip on the procurement process with a new system and is dealing with the problem of “ghost” civil servants on the payroll.
And the Treasury has agreed that the Reserve Bank should target a lower inflation rate, closer to that of our trading partners. That lowers inflationary expectations and ultimately helps lower interest rates.
Along with a weak dollar, all this good news has helped strengthen the rand by nearly nine percent against the US dollar this year. The Johannesburg Stock Exchange has surged. The index of the 40 stocks with the largest capitalisation on the market, the FTSE/JSE top 40, is up by 55 percent in dollar terms since the start of the year. The index has outperformed the MSCI emerging-markets index by 30 percent.
With the GNU and the improved fiscal state, our government bond yields have fallen, largely due to strong foreign inflows into the market.
Investors now see us in a different light. We are not a basket case, we are not about to default, our Reserve Bank and Treasury do a good job, on the whole, and we are at least worth betting on.
Financial stabilisation and slow and partial reforms are necessary to keep things going. However, it is unlikely that we will reach even three or five percent growth in the near future.
Without privatisation, an end to Black Economic Empowerment (BEE) regulations and an easing of the labour laws to make it easier and more cost-effective for small companies to raise employment, we are not going to see high growth. In addition to these three big reforms, another prerequisite for confidence, higher levels of investment and fast growth is that crime and corruption be addressed.
Three key reforms
This is a frequent refrain of the doomsayers, but there is a strong case for the three key reforms.
Reform has been very gradual, cautious and not overly ambitious. A major easing in regulations allowing private-sector participation in energy and rail has been successful. Private energy producers can now build and operate power facilities without a generation licence. That and the help of the Original Equipment Manufacturers of Eskom generators and boilers have kept the lights on, almost without interruption, since March last year.
In a first phase, Transnet has granted concessions to eleven private operators to six freight rail corridors. Next year Transnet will be looking at proposals from private companies to operate port terminals.
Should the growth rate double or triple, power cuts and bottlenecks at ports are likely to recur.
This partial privatisation of Eskom and Transnet by stealth will help growth, but will not get the country out of a low growth trap. A substantial reason for our low growth is the underperformance of state enterprises. Vast swathes of state enterprise are still unaffected by reforms.
It is the narrow range of the reform agenda and its slow pace that are the problems. The new draft Growth and Inclusion Strategy (GAIN), leaked to the Sunday Times and The Common Sense, seeks to partially address these issues. It is a candid appraisal of our predicament, and represents progress in the thinking of the government, but it fails to mention privatisation or BEE.
Greater guarantee
With reforms of the type it suggests, GAIN says SA could grow by 3.5 percent a year. Implementing the key big reforms that are not mentioned in this report would offer a greater guarantee of this sort of growth rate being achieved. GAIN pushes for Eskom’s restructuring, greater private participation in the power, rail, ports, and water sectors, as well as for cutting a lot of red tape.
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But GAIN pushes for support for the ailing steel and ferroalloy industries. It endorses the plan for a 25 percent tax on chrome-ore exports and preferential rates from Eskom for the sector. That would be a gross misallocation of resources. It displays at best some sort of bipolar disorder on reform. If the aim is to protect the workers who might be laid off, it might be better just to give them generous severance payments.
The recent good news on the economy means this is a good time to embark on the key big reforms. Sentiment is good and the wind is in our favour, but it is politically impossible for the ANC to undertake the big reforms without threatening its support base.
*Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Katzenellenbogen has also worked on Business Day and as a TV and radio reporter and newsreader. He has a Master's degree in International Relations from the Fletcher School of Law and Diplomacy at Tufts University and an MBA from the MIT Sloan School of Management.
This article was first published by Daily Friend and is republished with permission