The biggest drag on South Africa’s economy – and its not Eskom or interest rates

[Nat Quinn]

The biggest drag on South Africa’s economy – and its not Eskom or interest rates

Shaun Jacobs 

South Africa’s economy has stagnated over the past decade largely due to declining confidence in the country, typified by political uncertainty and a difficult business operating environment.

This is feedback from Old Mutual’s chief economist, Johann Els, who explained that South Africa suffers from a confidence crisis.

At the launch of Old Mutual’s Savings & Investment Monitor this week, Els said there are positive signs regarding economic growth in South Africa.

The country has experienced over 115 days without load-shedding, which is set to significantly reduce the cost of doing business and bring down inflation.

This is one of the reasons why the Reserve Bank may begin to cut interest rates at its next meeting in September, further boosting the economy by freeing up disposable income.

The reduction in diesel spending to keep companies operating during load-shedding should also result in an uptick in fixed investment, with businesses having more cash on hand to spend on growing their operations.

This will result in a shift from ‘subsistence’ investing to keep their doors open to growth investment, expanding their business.

Similar positive sentiment comes from a renewed drive to implement similar reforms in South Africa’s logistics sector.

Thus, two of the biggest handbrakes on South African economic growth appear to have been addressed or are in the process of being tackled.

However, Els said the South African economy has a much larger handbrake, which is a lack of confidence from local and foreign investors.

He explained that this is largely due to the country’s political environment, historically viewed as hostile to business.

This has been compounded by political uncertainty over the last decade, which escalated in the buildup to the national elections in May.

It has had a major impact on economic growth in the country, with declining confidence due to the political climate correlating closely with stagnant economic growth.

This relationship is shown in the graph below.

Els’ comments echo those of the head of research at Momentum Investments, Herman van Papendorp, and economist Sanisha Packirisamy.

Van Papendorp and Packirisamy identified the country’s political climate as the biggest constraint on economic growth earlier this year.

An uncertain political climate has consistently been rated as the top constraint facing new investment by manufacturers in a quarterly survey conducted by the Bureau for Economic Research.

This challenge is further intensified by South Africa’s inconsistent electricity supply and declining logistical capabilities.

While the local economy might see a lesser impact from load-shedding, logistical inefficiencies are poised to become the primary hindrance to growth.

Political instability aggravates these problems, stemming from a lack of political commitment to reform these crucial economic sectors.

Additionally, private companies and investors are wary of injecting funds into these sectors, which urgently need investment, due to uncertainty surrounding long-term government policies.

Executive director at Investec, Richard Wainwright, said the political climate is the main issue for South Africa and Africa in general.

“The issues are around uncertainty, particularly about policy frameworks. The continent and South Africa in particular have a lot of work to do on that front,” Wainwright said.

Increased uncertainty results in increased volatility in financial markets, which results in investments not being made.

He explained that high levels of uncertainty have a chilling effect on investment deals, with decisions effectively being put on hold.

“It is policy certainty that will be the key driver for investment,” Wainwright said.

Policy uncertainty worsened in the second quarter of this year, mainly due to the uncertainty surrounding the May elections. However, the potentially game-changing outcome of the elections could improve this later in the year.

Richard Wainwright

North-West University’s Business School released its Policy Uncertainty Index (PUI) for the second quarter of 2024, which revealed that the PUI moved further into negative territory.

The Q2 2024 PUI rose further into negative territory, to 68.3 from 65.8 in 1Q 2024, and was again elevated.

The main driver of the PUI’s second-quarter outcome was the perceived high level of uncertainty surrounding the recent elections.

“Although, as the political dynamics unfold, the economy will continue with its daily activities, the uncertain political outlook is now also weighing on investors and the markets as to possible election outcomes.”

The report highlighted the link between the policy uncertainty index and economic outcomes in South Africa.

“Empirically, it shows that when economic policy uncertainty is strongly present in the environment, it indeed lowers investment, employment, and output,” it found.

“High levels of such policy uncertainty inhibit meaningful investment and consumption.”

“Elevated policy uncertainty in many countries contributes to sluggish growth. Economic policy uncertainty then has actual consequences for the economy.”

source:The biggest drag on South Africa’s economy – and its not Eskom or interest rates – Daily Investor

[Author]

Posts