Structural reform or bust
It is almost five years since the so called sub-prime contagion triggered a global economic slowdown. But despite the myriad financial and regulatory interventions made by governments, central banks and even entire regions, think Euro-zone, the outlook fo
Rian le Roux, Chief Economist of Old Mutual Investment Group SA (OMIGSA) says that South Africa will struggle to make headway against the backdrop of low interest rates and on-going quantitative easing in the developed world. He was presenting at the OMIGSA Q4 2012 Press Conference held in Johannesburg, 16 October 2012. Global concerns aside, South Africa faces a “mountain of domestic worries”. Le Roux fears that the mix of economic, political and labour concerns will have a negative impact on the rand and decimate the country’s external accounts.
Short-term troubles highlight longer-term concerns
Recent media reports reflect serious underlying tensions in the domestic economy. The upheaval at Marikana, which resulted in 34 striking workers being gunned down in a standoff with police on 16 August 2012, goes way beyond the traditional ‘labour union versus employer’ dispute. Workers are protesting an unequal society and atrocious living conditions... The gold and platinum sector unrest has spilled over into other industries and both local and international investors are justifiably concerned.
Under such conditions the ratings agency downgrades to South African government and municipal bonds should not have come as a surprise. Likewise, the structural impediments to sustainable economic growth are no secret. South Africa’s single biggest problem is – and always has been – jobs. “We have not performed badly on the GDP measure; but employment has lagged badly,” notes Le Roux. It boils down to a poor labour absorption rate (the percentage of the working-age population that is employed) coupled with disconnects between private and public sector hiring policies. Public sector employment is up 10% since the “bottom” in 2008 compared to a 4% decline in private sector employment.
To tackle the current uncertainty we must determine where economic growth and jobs will come from. It is also imperative that policymakers take the bold and decisive action that will ensure that South Africa becomes economically and socially stable. Investors want policy certainty and more flexible labour legislation to name a few. “One would hope that recent events, ratings downgrades and the rand’s subsequent slump will elevate addressing South Africa’s economic woes up government’s policy agenda,” says Le Roux. He added that South Africa was the worst prospect among a basket of emerging economies at present – proof that domestic rather than global issues are dragging the economy down.
A four “drug” cocktail for faster economic growth
It is unlikely that South Africa will achieve more than 3% per annum GDP growth in the coming years. There are simply too many obstacles. The traditional underpins for economic growth are all spent. Government consumption needs to be reined in – there is little chance of private consumption improving due to low employment – foreign direct investment has come unhinged for a range of reasons already mentioned – and exports depend on a Euro-zone recovery that could be years in the making.
“We have a number of problems that we need to address,” observes Le Roux, listing a handful of structural issues that repeat at economic and investor presentations with frightening regularity. The first – particularly relevant given recent ‘blips’ in the value of the rand against the dollar – is not to allow the benefits associated with a weakening currency to be eroded by inflation. The second is that labour legislation needs an urgent rethink to facilitate greater labour absorption in the domestic market. Third on the list is tight management and control of government’s trillion rand infrastructure improvement budget. Finally, steps must be taken to restore business and foreign investor confidence. This demands a strong commitment to macro stability, fiscal prudence (including a tough stance on corruption), growth enhancing reforms and improved public sector service delivery and accountability. There you have it… Four simple points for a structural renaissance – nothing earth shattering – and nothing new.
Early warning signs of a rand collapse
South Africa’s widening current account deficit is a major cause for concern too. One of the remedies available to rein it in is to hike interest rates – and there is a risk that such rate hikes will coincide with a sharp devaluation of the rand. We have to go back to 1975 for a similar trade account situation... Back then the rand fell sharply despite 500 basis points in interest rates hikes.
Le Roux offers two alternatives for South Africa Inc. through 2013. Under the ‘local optimistic scenario’ strikes end quickly, stability returns and “government wakes up out of its three-year slumber and lays to rest concerns about populist policy thrusts”. A ‘foreign concern scenario’ is less promising. Under this scenario strikes escalate, confidence slumps, economic activity slows further, government adopts a populist policy stance and the rand collapses in a heap. Which would you prefer?
Editor’s thoughts: OMIGSA favours its ‘local optimistic scenario’ for 2013 and expects the economy to stabilise after a few months of volatility. Unfortunately further currency and labour turmoil can only be addressed through economic growth and greater employment. Do you think government will adopt sensible labour policy – including relaxing existing legislation and introducing the youth wage subsidy – to stimulate jobs growth? Please add your comment or send it to [email protected]
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