Debt, disease and dysfunction

Resolving the economic crisis in SA demands discipline, courage, conviction – and tough choices. There is no easy way out, but immediate policy reforms could be implemented to lift economic growth quickly, create jobs and boost industry competitiveness.

While Finance Minister Tito Mboweni’s emergency budget laid bare the country’s grim fiscal situation, it failed to square up to the fundamental question of how the administration will stimulate an economy knee-deep in debt, disease and dysfunction. For over a decade the problems have been clear as day, yet the remedial policy action and implementation have been unconvincing. And now, amid continued political gridlock, the chickens are coming home to roost.

The yawning fiscal deficit and resulting debt burden are symptoms of a far deeper malaise: the failure to address deficits in credibility, confidence and competitiveness. Simply put, South Africa has reached a point where it can no longer defy economic logic or pretend away deep social damage through hollow promises.

Mboweni, never shy to lament to the economic community, has suggested a constructive solutions-oriented approach. With that in mind, we explore the country’s real deficits and offer some pragmatic measures to steer South Africa out of the current financial morass.

Credibility deficit

First, the country faces a massive credibility deficit arising from the practice of overpromising, underdelivering and choosing political expediency over tough decisions. Faced with the prospect of a fiscal cliff, investors are sceptical of our leaders’ ability to take the tough action required to steer the country to a more sustainable economic path. If you need convincing, look no further than the bond market, with yields on two-year bonds at 4% and 10-year bonds at almost 10% – making for one of the steepest bond curves globally. Simply put, the bond market doesn’t believe the policy promises.

So, while Mboweni soothes and placates to encourage buy-in to his policy ambitions his references to hippos, aloes and long droughts are off the mark. They insult the nature, extent and depth of South Africa’s economic decline and social pain. The economy is deeply damaged – and in some respects broken – and with negative growth rates, soaring debt-servicing costs and a declining tax base, there is no way for the government to “spin doctor” itself out of this mess. Our unemployment rate has pushed above 30% and could reach 50% given the deep economic depression. Youth unemployment already sits at a socially devastating 59%. Having steadily worsened over the past 20 years, our income inequality is the most distorted globally. The fiscal deficit is set to balloon, and the deficit will probably double the 1992-93 record deficit of 7.2% of gross domestic product (GDP). Further, we estimate South Africa’s per capita income will end 2020 around the same level as 2010, making South Africa one of the world’s worst performers by this yardstick for the decade.

The opportunity to implement reforms in better times has been squandered. South Africa is now in deep trouble and pretending that everything is going to be fine rings hollow.

The message from the market too is loud and clear – front up and fix your problems, or someone else will. Indeed, as Peter Attard Montalto of Intellidex observes, “The endpoint of this game is painfully simple – if you close the hippo’s jaws you survive. If you don’t, you don’t – and the IMF will shut the hippo’s jaws for you.”

A loss of sovereignty in policymaking to the IMF, an inevitably on the current trajectory, will be more politically damaging to the ruling party than unpopular reform. This makes the continued inertia baffling, as the country continues to sleepwalk to this climax. But the bottom line is that investors in financial markets and the real economy simply don’t believe the country’s leadership has the willingness or ability to course correct.

Confidence deficit

Yet these credibility issues, which are based on clear evidence of mismanagement and the government’s poor economic track record, would be surmountable if prospects signalled improvement. However, forward-looking investor expectations are unnervingly poor, reflective of a severe confidence deficit.

Coming into the “covid crisis”, confidence was already brittle. It has now plunged, falling with economic activity. The South African Reserve Bank’s (SARB) business cycle indicators show the co-incident indicator falling by 26.8% year-on-year – the largest decline since records began in 1960. By comparison, the worst month in the 2008/09 financial crisis recorded a 12.4% contraction, and in 1983, in the run-up to South Africa’s partial debt default, the co-incident indicator contracted 15.2%. Meanwhile, the RMB/BER Business Confidence has fallen to its lowest level since the survey began in 1975.

Ultimately, recovery cannot happen until we deal with this gaping confidence deficit. The country has insufficient domestic capital to fund growth needs or to fill skills and technology gaps. Foreign direct investment (FDI) is therefore critical, but such bricks-and-mortar investment requires investor confidence to materialise.

Central to this is reversing the damage inflicted by regulatory hurdles and policy promises that “signal right but keep left”, eroding investor confidence and goodwill with mixed messaging. This has been especially true of central policy issues such as land reform, the SARB mandate and the rehabilitation of state-owned enterprises (SOEs). Additionally, the bizarre and continued insistence on nuclear energy policies, the funding of a bankrupt and rudderless state-owned airline and the absence of criminal convictions after a decade-long orgy of looting of state coffers, have left investors untrusting.

Meanwhile, low-hanging fruit which could catalyse investor confidence, create jobs and promote economic growth – including the release of spectrum and clarity on renewable energy projects – remain vague.

Competitiveness deficit

Last is a competitiveness deficit. There are three ways by which to measure the competitiveness of an economy – the performance of the country in world markets by way of export share; growth in per capita incomes as a proxy for country prosperity; and investment spend as a share of GDP as a guide to structural growth. On all three scores, South Africa is more than falling behind – the country is failing.

In terms of world export market share, South Africa has steadily fallen from 1.6% of world market in the 1970s to 0.8% in the 1990s, and 0.4% today.

In 2000, South Africa recorded a per capita income in line with the world average. By the end of 2020, world per capita income will stand more than 35% higher than South Africa.

In terms of investment spending as a share of GDP, the country’s competitiveness shows a similar deep sag. The latest value for the first quarter of 2020 is 12.8% – a long way off the global average (based on 150 countries) of 24.3%. This investment rate will support economic growth of 1.5% – and not much more than that.

All three indicators point to a country regressing at a distressing rate, and risking sliding into obscurity as a global investment destination.

Constructive solutions

So where does that leave us? If economic recovery comes, it will likely be slow and arduous. Frankly, growth estimates for 2021 of 2.6% by National Treasury and 3.8% by the SARB are uninspiring, and any economic recovery is likely to be fleeting in the absence of urgent restructuring.

Yet, there are immediate policy actions and reforms that have the capacity to lift economic growth quickly, create jobs and boost industry competitiveness.

First, an integrated pan-African strategy for SA Inc built on economic diplomacy and continental corporate citizenship must be urgently activated. In the context of the African Continental Free Trade Agreement (AfCFTA), South Africa can be a clear winner if it offers itself as a regional gateway and exercises continental leadership and collaboration. Our research presented in the Visa African Integration Index since 2012 demonstrates the substantial win-win outcomes that are available. The country’s economic size, sophisticated banking and corporate sector, and advanced infrastructure all present compelling comparative advantages which can act as economic stimuli if properly leveraged.

Second, South Africa needs a radical overhaul of digital infrastructure and skills to meet the demands of the modern working world. At present, data access is limited, and data costs are prohibitively expensive, while the operational environment trails significantly behind continental peers. Digital inclusion – specifically the provision of widespread data spectrum must form the cornerstone of this transformation strategy. To date, plans for 5G have remained dormant due to a lack of capacity and telecommunication operators have been forced to refarm 2G and 3G spectrum to provide 4G services.

Democratised digital access has the potential to act as a great enabler through bypassing traditional access constraints, especially in areas such as healthcare and education. Furthermore, the associated leapfrogging effects and scaling benefits arising from digitisation make them an essential component of any inclusive growth strategy.

Next, given Eskom’s woes, alternative sources of energy are essential. New incentives and creative public-private partnerships to attract catalytic investment in these areas, and to diversify the energy mix, are critical. On this score, South Africa has distinguished itself in developing a world-leading renewal energy framework for independent power producers. This needs to be asserted. A smarter, more flexible grid along with changes to the transmission and distribution of electricity will go a long way to fixing South Africa’s energy crisis.

Fourth, amid global supply chain disruptions and increasing localisation, South Africa can place agriculture at the forefront of its economic model and act as a breadbasket for the region. Improving agricultural output will not only generate employment and enhance exports, but, in a context where food security is becoming increasingly important amid rising geopolitical tensions, this area could be a drawcard. The evidence on economic development paths set out in Joe Studwell’s work on Asian economies, for instance, make a compelling case – and show the way in which this path can translate into inclusive industrialisation.

Finally, the country has deep and sophisticated financial markets that could be turned from financing an extractive, debt-based consumer culture to an investment-led path with high economic and social impact.

Notably, these ideas are not new. They have already been tabled under Tito Mboweni’s 2019 Economic Transformation, Inclusive Growth and Competitiveness policy proposals. Equally important, these policy changes can be brought about, quite literally, at the stroke of a pen and with a healthy dose of political courage.

On this score, we don’t expect the elephant to be eaten in one bite. Rather, we borrow from Liberia’s Ellen Johnson Sirleaf. Determined in her commitment, when she came to power in 2006, she put in place a list of 85 projects to be delivered over 150 days, that ranged from road repair and the electrification of schools to the development of a comprehensive anti-corruption strategy. Strikingly, these were not grand policy promises. Rather, they were implementable, measurable, reportable and had immediate impact. Her government reported a 75% success rate in delivering on these projects, demonstrating capacity and building confidence in a damaged country.

For South Africa, there are no silver bullets or quick-fix solutions as we attempt to navigate the triple challenges of debt, disease and dysfunction. Ultimately, we’re walking on hard ground, and our work is cut out. This is not the place for talking and pointing. This crisis demands discipline, courage, conviction – and tough choices. What South Africa needs urgently is the transformation of words and promises into determined policy action. An actionable, closely monitored and nationally reported 150-day plan would be a good place to start.

The longer we continue to fiddle, the more fatal the consequences.

This article, written by Cannon Asset Managers CE Dr Adrian Saville and Signal Risk Director Ronak Gopaldas, first appeared on Daily Maverick.

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