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Investing at the tipping point

04 October 2021 Gareth Stokes

It is time for the business sector to put pressure on the governing party and lead the quest for a better South Africa for all. This refrain emerged strongly during a presentation by economic analyst, Daniel Silke, to Sovereign Trust’s 2021 International Retirement Seminar. Silke set out to answer the question: South Africa: Tipping or turning point? with a deep dive into the predominant economic and political trends. “You could very well argue that forces of doom and gloom are pushing South Africa over the edge,” he said. “There is one path which leads South Africa to disaster and another that is somewhat different”.

The slow march offshore

Knowing whether South Africa Inc is close to keeling over or simply charting a course to benefit from economic tailwinds is important to the financial advice community, whose clients are hungry for strategies to move their wealth offshore. But it turns out there are as many views and opinions on the country’s economic prospects as there are presenters at a financial planning seminar! To further complicate matters, South Africa’s investment case is easily distorted by individual biases. Financial advisers have to take care to compensate for both optimistic and pessimistic views when presenting an objective financial plan. “It is good to have balance when assessing South Africa,” said Silke, who warned of a somewhat lacklustre post-pandemic economic recovery. 

South Africa, which was on track for 4.5% GDP growth in 2021, will probably see 50 basis points lopped from this number due to the civil commotion that took place in KwaZulu-Natal and Gauteng in July. In fact, the OECD has forecast that it will take until 2024 for South Africa to rebound to its pre-pandemic per capita GDP, which is way too slow to make a meaningful impact on our myriad socioeconomic challenges. In the absence of economic growth, the country will be unable to make a dent in the rising unemployment number or alleviate the mounting fiscal debt burden. “The fact that 64% of South Africans under the age of 35 are unemployed is a serious indictment on South Africa’s economic policy,” said Silke. 

Too many socioeconomic problems

There are countless shocks that have put a damper on the country’s growth, not least of which the economic and social impact of the Covid-19 pandemic; the economic fallout following the July 2020 civil commotion; the ongoing clash of political ideologies within the governing party; and substantial infrastructure shortcomings. “You cannot underestimate the political power shift that occurred once president Zuma left office and president Cyril Ramaphosa took over; his ascent represents the disruption of the Zuma-era patronage network,” said Silke. Closer scrutiny of the public sector wage bill and state tenders will likely contribute to further political instability in the coming months, especially with the looming 2021 Municipal Elections. 

The economic and political outlook are closely interlinked. “Part and parcel of South Africa’s problem is that we do not have a sufficiently competitive democracy,” said Silke. The ANC has not had to face the fear of losing an election and the opposition is not strong enough to hold it to account. According to Silke, the consequence of this power imbalance is a country built around mediocrity. “If you keep on rewarding mediocrity then you risk moving towards a tipping point,” he said. It is this mediocrity, which partly exhibits as economic policy uncertainty, that contributed to the country missing out on much of the opportunity on offer during the previous commodity super cycle, which ended 2011. While the rest of world latched on to soaring commodity prices, South Africa got caught up in two-year-long debate about nationalising mines. 

Today, a decade later, the private sector remains constrained by employment equity, labour regulation, licensing delays and ownership issues, with the result we have a far smaller and less productive mining sector to benefit from the 2020/21 commodity price boom. The bottom line is that policy uncertainty has a big impact on growth, which is not great news given that expropriation of land and nationalisation of private sector assets remain on the table. The incoming minister of finance, Enoch Godongwana, is painfully aware of these challenges.  “The minister recently commented that the local economy has not performed well for a long time,” said Silke, who added that the minister was clearly aware of the damage caused by economic policy uncertainty. 

The threat of radical economic transformation remains

The jury is on out on whether the country will benefit from sensible economic policy change; but it seems unlikely given the dual threat to the governing party posed by unhappy, RET-aligned insiders and the looming threat of a growing Economic Freedom Fighters (EFF) faction. Unfortunately, global investors are not sitting on their hands waiting for Africa to sort out its issues. Their money will seek out returns in developed market equities, especially in the US, and investment opportunities in China and developing Asia. Sub-Saharan Africa, meanwhile, could face a bit of an investment drought, compounded by the slow vaccine rollout across the region. 

South Africa has great potential; but it will take a concerted effort from both business and individuals to steer the country away from the tipping point and onto a more positive path. “If South African voters does not hold the ANC to account, then we run the danger of reaching a tipping point,” concluded Silke. “We are all in this together; all shareholders in South Africa Inc”. 

Writer’s thoughts:
It can be frustrating living and conducting business in a country that never delivers to its true potential. All that Silke achieved during his enthusiastic presentation was to remind us of thy myriad constraints that prevent the country from going forward. He left the audience with the sense of unease that goes with being trapped in an economic policy Groundhog Day! And this got me to wondering: Can your overly positive view on South Africa Inc contribute to poor long-term financial advice outcomes for your clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za

Comments

Added by Gareth Stokes, 05 Oct 2021
Thanks for sharing @Peter. Yes, our Finance Minister had some good things to say; and like you, I really hope for some follow through from government on all points raised. Sadly, a poor ANC / strong EFF showing at the upcoming local elections could see some of the crazy policies being accelerated rather than shelved.
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Added by Peter Dexter, 04 Oct 2021
I agree with everything Daniel, Mark, and Rob Hersov have said. However, last Thursday a tiny glimmer of light shone down the tunnel, which may be the failed state train about to flatten us, but hopefully, is not. Enoch Godongwana, speaking at the Sunday Times National Investment Dialogue, made some positive & sensible comments, contrary to the economic direction the ANC has been heading in of late. This was the little light I refer to.
1. He acknowledged having heard Rob Hersov's speech, said he liked and respected him, and agreed with much of what he had said. (That I did not expect.)
2. He acknowledged that businessmen invest to make money: not to employ people: Employment is merely a positive byproduct.
3. If investors cannot fire employees, they won't hire them.

Every economist and financial planner is going to say these are obvious, but they indicate a major direction change by the ANC - If implemented.
Peter Worthington correctly pointed out that the ANC's track record on "Talk" is great, but the "Walk" part is sadly lacking. We will have to wait and see if they have the courage to do what is right for South Africa, or whether their fear of the EFF is just too great to avoid bad populous policies like EWC, BEE and NHI.
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Added by Gareth Stokes, 04 Oct 2021
Agree with your sentiment @Mark. Quite fascinating that the ANC, through CR, acknowledged the impact of cadre deployment; but refuses to make entertain change. I.e. Yes, it cadre deployment has bad outcomes; but it is and will remain an integral component of ANC 'think'.
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Added by Gareth, 04 Oct 2021
Thanks 'Old Timer'. I watched Rob Hersov's interview, which I believe was conducted by Alec Hogg of Biznews... Also saw a 'call back' that was run a couple of days later, in which some of Rob's views were expanded on. What amazes is that everything Rob mentions has been repeated in the mainstream media ad infinitum. Nobody in government is listening; or more likely, nobody cares!
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Added by old timer, 04 Oct 2021
Check out 'If Madiba were alive today, he would vote DA', - ROB HERSOV on YouTube.

Says it all.
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Added by Mark, 04 Oct 2021
Suggesting that this government rewards mediocrity is a gross overstatement. It rewards ineptitude, through cadre deployment and rewarding loyalty above competence and appropriate qualification. How can anyone be optimistic with such ineptitude?
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