Can SA avoid a sovereign ratings downgrade by Attracting Investment to Grow the Economy?


Despite a terrible start to 2016, South Africa managed to avoid a ratings downgrade in June and we were on a positive economic trajectory for a brief period, thanks largely to the local government election which demonstrated the strength of our democracy, and external factors which buoyed emerging markets. The rand enjoyed a brief period of strength but it now seems that much of the positive sentiment and confidence has been lost as political risk once again emerges.

At a recent Accelerate Cape Town CEO Engagement, focused on Attracting Investment to Grow the Economy with Standard Bank CEO Sim Tshabalala, it was emphasised that the structural reforms required for the country’s growth and prosperity are arguably far more important than the sovereign credit ratings pronouncement expected in December. Irrespective of the rating agencies’ decision, current GDP growth rates are insufficient and require stimulus and sustained action. Continued growth at sub-3% levels is a recipe for disaster as unemployment and social strife would escalate rapidly, along with soaring costs, and high levels of debt becoming unsustainable.

Our low economic growth and high unemployment are largely due to the lack of business confidence resulting from policy uncertainty and political risk. A discordant government lacking fiscal prudence and unable to ensure sound governance at State Owned Enterprises (SOEs) is wreaking havoc with our economy. The decision for example to re-appoint the chairperson of SAA is beyond comprehension given the unmitigated disaster she oversaw during her previous tenure, resulting in a massive drain on public funds.

The need to keep our debt-to-GDP ratio below 50% was highlighted during the session, along with the fact that SA needs specific action for growth, including labour reforms for more flexibility, reviewing the economic sense of the national minimum wage, implementation of mineral and resources legislation and lastly, that the governance and balance sheets of SOEs must be turned around.

It was also emphasised that business leaders need to get involved directly as well as through organised business to engage government, and make a case for the type of business environment needed for prosperity.  Business is concerned, however fully prepared to play its role in driving the economic growth required for everyone’s benefit. This requires political stability, policy certainty; and a well-governed environment with institutional integrity, respect for the rule of law, and constitutionalism.

The collaboration between business, government and labour is arduous but gaining traction, and four key work streams have emerged, namely; avoiding a sovereign ratings downgrade, funding and supporting of SMEs, youth employment, and driving key investment projects in targeted industries.

The assembled group of business leaders focused on the fourth work stream, which includes SOEs, and discussed sectors of the economy that have the greatest potential for accelerating growth and creating jobs.

These sectors and their specific interventions include:

Education: a sub-stream has been created to tackle challenges related to funding of the built environment in higher education; as well as driving collaboration between business, education authorities, and teachers’ unions to identify innovative ways of incentivising star teachers and increasing the use of ICT in schools.

Health: this team is focused on improved private sector training of nurses and medical specialists.

Pharmaceutical: focus areas for this sub-stream include legislative changes to encourage local manufacture of pharmaceuticals, and discussion around the proposed NHI scheme.

Manufacturing: this team is fighting for better alignment of National, Provincial and Local infrastructure. Challenges include increasing competition from labour imports, increasing labour costs, high energy costs, and regulatory uncertainty.

Mining: mineral and resources legislation urgently requires finalisation and is getting serious attention. Prospects are good that these issues would be resolved shortly which could result in a positive confidence shock and much-needed boost to the sector.

Agriculture: driving collaboration between government and private companies to identify investment opportunities that could be unblocked through funding and regulatory change, particularly given our current draught situation. There is also the urgent need for greater policy and regulatory certainty with respect to water and property rights.

Tourism: a key South African sector with significant potential for job creation, some of the changes being debated here include visa free travel for business people to and from major trading partners in Africa and other emerging markets. Currently, government is considering visa on arrival for India, Russia and China, amongst others.

Governance and funding of SOEs: ideas have been developed on the governance and funding of SOEs and these are currently in debate. This is an absolutely critical aspect of our national economy with over 700 SOEs currently operating in South Africa. SOEs are a substantial burden on the taxpayer and our economy, especially when they make large, persistent losses. The aforementioned SAA have cost Treasury more than R30bn in bailouts since 2007, and during the 2014/15 financial year alone, 2% of total government revenue - R20.6bn - was lost due to the incompetent performance of the five largest SOEs.      

Whilst there are numerous challenges and much work to be done, there is however no need for paralysis or panic. Our country and this hard-won democracy is maturing at a fast rate, and it is modernising rapidly with a largely youthful population. We have reforms to make and we are aware of what they are. With collaboration between business and government greater than before, it is not entirely foolish to be hopeful about what is possible.

As the Q2 2016 GDP growth figures demonstrated, with 3.3% being the highest growth rate since Q4 of 2014, all is not lost due to the current political malaise and there is much to work toward as corporate South Africa.

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