Fixing the rot and the need for reform in South Africa

Over the past year it was easy to become negative about the SA story, especially with a variety of inquiries and commissions on the go, all highlighting just how bad things were with respect to state capture and mismanagement at the South African Revenue Service.

But this spotlight should be regarded in a positive light. It is, after all, part of a repairing process. There have also been constructive engagements between big business and the Presidency and President Cyril Ramaphosa has been pragmatic and consistent in his messaging. However, while there have been important management changes in SA’s s state-owned enterprises this has not yet led to any de facto reform initiatives and considerable policy uncertainty remains.

We have previously articulated the importance of reform in unlocking the considerable potential that SA has on the economic growth front. National Treasury published in its 2018 budget review the potential economic impact of selected reforms. Treasury pointed out that an improvement in confidence could add 0.5% to potential gross domestic product while telecommunications reforms would add 0.6%. Removing barriers to entry adds another 0.6%, while transport reform and prioritising tourism and agriculture could add a further 0.5%. This adds up to a potential growth rate of 3.7%, which would serve to make inroads into SA’s exceptionally high unemployment rate.

The big question is, therefore: When are we going to see evidence of these reforms?

There is a widespread expectation that the ANC will win the national elections, which are likely to be held in May 2019. The common wisdom is that the greater the extent of the victory the greater will be Ramaphosa’s ability to consolidate the ruling party and initiate with urgency the necessary structural reforms. Land reform is unlikely to be conducted in an irresponsible and economically damaging manner and should not result in a loss of property rights. Greater title and involvement in the formal economy by a greater proportion of the population means upside economic growth potential. However, there is always the risk that any ongoing populist measures could constrain reform potential, in which case business confidence would battle to recover from its current severely depressed levels.

It is impossible to overestimate the importance of reform and the growth it inspires in alleviating poverty and social ills. Growth is mentioned a great deal in this article, in part because it triggers a positive reinforcing cycle. Debt levels become a smaller proportion of an ever-expanding economic pie, the county becomes more credit worthy and debt service costs come down. Government spending can then be better allocated towards investment which, in turn, allows the economy to grow more rapidly.

According to a recent World Bank report, only about 60% of working age South Africans participate in the labour force and of those more than 27% are unemployed. Among the youth the unemployment rate is over 50%.

The question is: What does this all mean from an investment perspective? Well, markets reward growth. In such an environment corporate earnings are boosted and valuations are enhanced. Greater productivity also reduces inflation and interest rates which also boosts valuations.

In short: Reform is a win for investors and for SA as a whole.