Policy uncertainty ratcheted up in the third quarter as civil unrest, tougher lockdown restrictions and conflicting policy messages eroded business confidence and the SA investment climate.
The latest policy uncertainty index released by the North West University (NWU) Business School on Monday showed that the index worsened to 58.2 points in the third quarter from being on the brink of positive territory at 50.3 in the second quarter of the year due to an economic rebound.
The quarterly index is a gauge of perceptions of policy uncertainty, in which an increase beyond 50 points reflects heightened policy uncertainty and a decline below this level means reduced uncertainty.
Policy uncertainty has been linked to declining investment and is associated with souring business confidence. This dampens SA’s efforts to grow fixed investment to boost growth and create much-needed jobs in an economy with one of the world’s highest unemployment rates.
The last time the index was in positive terrain was during the first quarter of 2018 — during the first blush of President Cyril Ramaphosa’s administration, dubbed “Ramaphoria”.
The latest release follows calls from finance minister Enoch Godongwana last week to make the environment more conducive to doing business in SA.
Though SA’s largest non-financial corporates are sitting on about R1-trillion in cash, Godongwana said he did not believe that there was “an investment strike” by domestic businesses, but rather that the environment was not conducive.
Deteriorated sharply
“We have got to find a way between ourselves and business, not only to work together on public infrastructure but also to help business with the normal day-to-day business to invest and remove all the obstacles which impact on them,” he said.
SA’s levels of fixed investment have deteriorated sharply in the past decade. A recent revision to SA’s GDP numbers revealed that the problem is worse than previously thought, with gross fixed capital formation, a proxy for investment, having fallen to below 15% of GDP. This is deemed far below the levels needed to create sustainable growth in the economy and create work for the jobless.
Meanwhile, according to the SA Reserve Bank’s latest quarterly bulletin, after the revision, the average rate of contraction in real gross fixed capital formation between 2010 and 2020 has almost doubled, from 0.6% to 1.1%.
According to NWU’s Prof Raymond Parsons, negative factors greatly outweighed positive ones in the third quarter, pushing the uncertainty index needle “much higher”.
“The reduction in some existing policy uncertainties in the second quarter of 2021 was strongly neutralised ... by the creation of new ones in [quarter three],” he said.
Embattled sectors
“These included the serious civil unrest at the end of July, the move to lockdown level 3, conflicting policy announcements [for example] on energy and the continued perceived implementation risks at various levels.”
Despite the negative effect of the civil unrest, there is now the prospect of a “better-than-expected growth performance for 2021 as a whole”. On Thursday, Ramaphosa lifted SA’s lockdown restrictions to level 1, which is expected to be a boon for some of the most embattled sectors of the economy such as tourism.
But this good news must be converted into “sustained job-rich growth in the years ahead, driven by fixed investment”, Parsons said.
“The well-known constraints on higher inclusive growth, such as the absence of energy security, lack of policy coherence, weak confidence and slow progress with structural reforms, still need urgent attention to boost investment and put the SA economy on a much higher growth path,” he said.
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