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The aftermath of promises made

03 April 2018 Myra Knoesen
Myra Knoesen, FAnews Journalist

Myra Knoesen, FAnews Journalist

The Cyril Ramaphosa-rally has changed sentiment, but will it translate into sustainable economic growth and business confidence for the future? FAnews spoke to a few investors about this.

Looking back over the years

Stanlib Chief Economist, Kevin Lings says the South African economy has struggled to gain any momentum since the global financial crisis in 2008/09, despite a relatively positive global economic backdrop.

“Instead, South Africa's economy has decoupled from the performance of the world economy, averaging growth of a mere 1.5% over the past nine years and a mere 0.8% over the past three years. This underperformance is reflected in rising levels of unemployment, increasing tax revenue shortfalls, depressed levels of consumer and business confidence, a protracted fixed investment recession in the private sector and credit rating downgrades,” he said.

“However, in the aftermath of the conference the leadership of the government will have to increasingly turn their attention to the economic challenges facing the country. These challenges can be broken down into five main categories, namely uplifting business confidence in order to stimulate private sector fixed investment, restoring fiscal discipline, reforming State-Owned Enterprises (SOEs), ensuring clear and consistent transformation policies and reducing the extent of corruption in both the private and public sectors. The government’s ability to successfully address these challenges will shape South Africa’s economic performance over the next few years,” continued Lings.

The months ahead

“Fortunately, and unsurprisingly, the reaction in South Africa’s financial markets to the election of Cyril Ramaphosa as president has been extremely positive, especially the Rand exchange rate and the domestic bond market. This is partly because Ramaphosa has highlighted the need for policy clarity and the importance of lifting business and consumer confidence. In the short-term it is hoped that government will focus on improving the fiscal position in many of the large state-owned enterprises, including Eskom, as well as strengthening key institutions such as National Treasury and the South African Revenue Services. Under these circumstances it is possible for the country to avoid further rating downgrades and start to lay the foundation for an uplift in economic performance,” said Lings.

Without a sustained pick-up in economic growth, Lings says the fiscal authorities are going to find it increasingly difficult to meet their budget projections and the country will continue to face the risk of additional credit rating downgrades, rising unemployment and further social tension.

“While there has been an improvement in political stability, a fundamental change in the Eskom board, and an uplift to household income growth, given the expected moderation in consumer inflation due to recent currency strength, significant challenges remain. These include, the need to start to reform other key SOEs, on-going policy uncertainty (for example the mining charter, land redistribution, the use of nuclear energy, the funding of tertiary education, the roll-out of National Health Insurance, debt forgiveness), and a lack of private sector capital expenditure, including maintenance capex. More positively, there is a reasonable expectation that the overall economic performance of the country will improve meaningfully in the months ahead,” continued Lings.

Restarting the engine of growth

In looking at the recent Budget Speech 2018, Ronald King, Head of Public Policy and Regulatory Affairs at PSG Wealth said, “Although Finance Minister Malusi Gigaba did the best he could do given the current financial situation of the country, it is impossible to tax yourself into prosperity.”

“While the Budget did instil investor confidence, it will not in itself create sustainable economic growth in the country over the long-term,” he continued.

For that, King says we need an effective government with no wasteful spend, the correct allocation of resources and incentives, regulatory certainty and pro-business strategies.

“These, together with the business confidence created as a result, will restart the engine of growth, which is local businesses,” said King.

It will take time to bear fruit

Sandile Malinga, Portfolio Manager at Prudential Investment Managers says, “Ramaphosa’s election and cabinet reshuffle have ushered in new optimism, but it is too early to say whether we can achieve sustainable growth. The steps needed to accelerate economic growth are likely to be onerous and take time to bear fruit,” emphasised Malinga.

“First, consumer spending is set to benefit from higher confidence, the new minimum wage and somewhat lower inflation and interest rates in 2018, but debt burdens remain high and a drag on consumption. Consequently, we may see some improvement in household spending from 2017 levels, but not a sudden jump. Another positive contributor is likely to be exports, which have been growing against the backdrop of accelerating global growth that should continue this year,” continued Malinga.

“On the downside, in order to kick-start investment, companies need to see uncertainties around key policies (including the mining charter, BBBEE, telecoms broadband, and a host of others) resolved. Given the divided ANC, agreement on these policies is likely to take time to achieve. Finally, the government is reducing, rather than increasing, its spending in order to reduce the government budget deficit and avoid further credit rating downgrades, so this is not likely to be a significant source of short-term economic stimulus,” said Malinga.

“Investors need to guard against expecting a “quick fix” for the local economy, but South Africa finally looks to be on a path toward higher economic growth and improved governance,” concluded Malinga.

Editor’s Thoughts:
As emphasised above, things will take time to change, it will not happen overnight. However, considering how far we are down the line, one questions how long it will (realistically) take for the country to get back on track. What do you think? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.

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