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ANC take note… 3 golden rules for economic growth

02 December 2021 Gareth Stokes

A stable currency, free trade and the protection of private property rights are three non-negotiable rules for economic growth. “Private property rights are absolutely crucial for any economy to function,” said Dawie Roodt, Chief Economist at Efficient Group, during a frank assessment of South Africa’s economic prospects entering 2022. He noted that threats to private property rights included ordinary criminal activity, excessive land taxes being levied by the state, and the blatant threats being made under the ‘expropriation’ mantra.

Smashing the protection of private property rule, literally

The protection of private property was a great place to enter the debate, given the looting and rioting that afflicted areas of KwaZulu-Natal and Gauteng in July 2021. Over a handful of days, criminal mobs descended on distribution centres, malls and a range of other business assets to cause more than R52 billion in damage to private property. According to South Africa’s special risks insurer, Sasria SOC Limited, they received more than 14000 claims for losses following the event, totalling R32 billion. To this total, one must add around R10 billion that was covered by other insurance mechanisms and a further estimated R10 billion for uninsured losses. This criminal catastrophe offers picture-proof of the consequence to an economy of breaking a golden rule. FAnews wrote about the rioting and associated costs in our recent newsletter: ‘14.9 billion reasons to pay riot claims’. 

“The second important thing, the second golden rule, is free trade; you must be allowed to buy and sell goods and services, including your labour, without impediment … and the state should facilitate this,” said Roodt. Free trade is good for economic growth because it benefits both buyer and seller. Both government and private sector firms are forever looking for ways to tilt the benefit scales in their factor. Governments will, for example, introduce import tariffs or local content rules to protect local industries from both real and perceived threats. South Africa’s steel and motor manufacturing industries are case in point, with many incentives and protections offered over decades. Sadly, the negatives of trade protections frequently outweigh the positives. 

Money greases the wheels of trade

Sound money is important too, because it facilitates trade… “Money must be sound, it must have low levels of inflation and it must be suitable for measuring the price of things relative to other things,” said Roodt, introducing the third non-negotiable. You need only cast your eyes north, to Zimbabwe, to see the impact of an unstable or unsound money system. Citizens in that country have had to navigate hyperinflation and a complex currency system with massive differences between official and unofficial exchange rates between Zimbabwe dollars and the US dollar. The South African Reserve Bank (SARB) was commended for doing a great job of managing the rand, though it was criticised for being a trifle slow on acting on inflation. As luck would have it, the SARB announced a 25 basis point hike in the Repo rate just hours after Roodt’s presentation. Dawie you called it! 

The fast-paced presentation then considered the big picture themes that would affect all economies, developed and emerging, over the next year or two. Demographics was first on the list, with the presenter observing that populations in many countries were actually falling, and average ages increasing. Africa is an exception to this, with a young and strongly growing population. There are also a worrying number of political flashpoints worldwide, including those between China and Taiwan; Belarus and Poland; and Russia and Ukraine… Any of these flashpoints could erupt at short notice, creating a range of hardships and uncertainties. 

“The world is also experiencing significant supply chain disruptions, which are in turn part of the reason for inflationary pressures globally,” said Roodt. He is of the opinion that US inflation will prove temporary; but admits being surprised at how long the high inflation situation has prevailed.  And finally, Western governments are still spending money like there is no tomorrow! According to Roodt, it is long overdue that central banks abandon their “exceptionally accommodative monetary policy” and that governments withdraw their quantitative easing programmes. Such steps have the potential to be hugely disruptive to global economic growth outlook… 

Turning the spotlight on South Africa Inc

Efficient Group used a series of graph to illustrate the country’s dismal 25-year performance under ANC rule… First off, Roodt confirmed that South Africans, your clients, are getting poorer relative to global citizens. South Africa’s per capita GDP as a percentage of the world’s per capita GDP has slipped from 85% in 1995 to less than 65% today. This worrying slide persisted across a number of country comparisons. Since Eskom is on everyone’s mind, Roodt then offered up an electrifying (sic) comparison of out electricity production compared to China: “25 years ago, South Africa on a per capita basis, produced more than five times the electricity that China did, by 2019, we were generating less electricity per capita than China”. 

This writer admits to feeling a bit punch drunk 10 minutes in to Roodt’s presentation, as South Africa took severe head blows for its performance on measures as diverse as education, fiscal debt management, life expectancy, productivity and various World Bank Global Effectiveness rankings. And the only positive after 25-minutes was that the rand, at around 15.50 to the US dollar, was in fair value territory. “We are confident that the currency is more or less correctly priced now,” declared Roodt, who then seemed to suggest that we run for the hills, aka offshore, while we still can. “If you are considering taking your money out of South Africa, today is as good a time as any,” he continued. 

One of the biggest challenges facing South Africa is the growing burden placed on the productive sector of the economy by the exploding social grants network. There are approximately 14 million people employed in South Africa presently, including around two million civil servants. As things stand, the taxes paid by these 14 million citizens must fund 18 million standard grant recipients plus another 9.5 million individuals who are receiving the emergency Covid-19 stipend. This means that close to 30 million people are relying on some or other form of government assistance to get by. PS: It was not clear how much double counting may have been in this number. Against this backdrop, Roodt warned that South Africa could expect further social upheaval in coming months. 

Entrepreneurs should step in to make a difference

There are also ongoing concerns about the cost of non-grant social interventions such as the National Health Insurance (NHI) alongside the poor performance of many state-run entities. “The good thing about having an incompetent government, is they cannot implement a bad idea like the NHI,” said Roodt… This writer, though, reckons that not having the competence to implement will not deter government from pushing ahead. 

“There are some opportunities in South Africa, especially if you are an entrepreneur focused on areas where the state is falling apart; if you want to start a new business, see what the state is supposed to be doing … there is very little competition, and the guys that do compete with you are totally and absolutely incompetent,” opined Roodt. As far as investments were concerned, he felt that there were better opportunities for South Africans offshore. But if you have to stay invested in South Africa, then you should be sure to sink funds into the most promising sectors including agriculture, banks and financial services, education and medicine. 

Writer’s thoughts:
Efficient Group’s chief economists launched a scathing attack on South Africa’s ruling party for its innumerable shortcomings since 1994; but he did not share much that had not already been said on some or other public platform. Given the gloomy political / socioeconomic outlook, how do you find positives to share with your clients during those all-important financial and risk planning sessions? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comments

Added by Ayanda, 02 Dec 2021
Come to think of it, perhaps these dolts should go ahead with the EFF's idea of the state nationalising all land. This would immediately relieve all those with mortgages of further repayments (why pay off something that will never be yours to sell?), it will immediately relieve all residents of the expense of maintaining their properties (why paint or repair a dwelling that is not yours to sell?), and will immediately relieve residents of their municipal rates, as only owners pay these.
Whilst the banks and municipalities will then collapse, the rest of us will suddenly have lots more disposable income in our pockets ! :-)

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