Policy uncertainty in SA has reached unprecedented heights due to a combination of the Russia-Ukraine war, global supply chain disruptions and geopolitical factors, which have heightened risk and volatility.
Policy uncertainty affects growth, employment and investment.
The policy uncertainty index (PUI) for the first quarter of 2022 released on Monday by North-West University (NWU) Business School showed a dramatic rise to 59.7 from 53.2 in fourth quarter 2021, the highest recorded since the index’s inception in 2016.
An increase in the index beyond 50 reflects heightened policy uncertainty, while a decline means reduced uncertainty. The PUI is published in January, April, July and October of each year.
The measurement of policy uncertainty has important implications for business confidence and the investment climate. Hardly any recent economic assessment or media release from international or local financial institutions, business lobbies, economic analysts, financial journalists or credit ratings agencies appears without the words “policy uncertainty” in them.
Raymond Parsons, professor at the NWU School of Business & Governance and a special policy adviser to Business Unity SA, told Business Day that high levels of policy uncertainty inhibit investment and consumption, while elevated policy uncertainty in many countries has contributed to sluggish growth.
“The institutional setting and policymaking environment clearly influence the extent to which negative shocks and developments lead to bad outcomes and tough policy challenges,” he said.
He added that a deeper understanding of how uncertainty “shocks” affect the SA economy will help policymakers assess how future shocks will affect markets and business.
In his latest monetary policy committee (MPC) statement, SA Reserve Bank governor Lesetja Kganyago cited policy uncertainty and load-shedding as main constraints to SA’s economic growth. He said as a result of this, economic and financial conditions are expected to remain more volatile for the foreseeable future.
The index is measured using three elements: media data, a survey of economists and the University of Stellenbosch’s Bureau for Economic Research survey of manufacturers’ experience of policy or political uncertainty.
Data shows that over the past three months the PUI was mainly driven by the big shock and heightened global economic unpredictability arising from the Russia-Ukraine conflict, which reinforced continued domestic uncertainties such as the country’s challenge to get total private and public investment much higher, the lack of energy security and the inefficient rail and port system.
The index’s negative posting was also largely driven by deteriorating consumer confidence in the first quarter of 2022. Confidence among SA consumers fell sharply in the first quarter, reaching its lowest level since the middle of 2021 when the country was grappling with the Delta variant of Covid-19 and lockdowns. Russia’s war with Ukraine triggered new concerns about inflation and the outlook for growth. Retailer confidence in the first quarter of 2022 also showed signs of contraction. The situation is likely to get worse, with expected fuel and grain price increases as a result of the war.
In addition, domestically both the consumer price index (CPI) and the production price index (PPI) became elevated in the second half of 2021. The latest PPI accelerated to 10.5% in February, while CPI inflation came in at 5.7% in February with risks remaining on the upside.
But Parsons said 2022 could still be a positive turning point for SA’s economy. He said if SA wants to manage the balance of risks, absorb the pressures and exploit the opportunities that may emerge from the Russia-Ukraine conflict, SA must remain globally competitive by providing energy security as well as ensuring an efficient rail and port system that enables exporters to successfully access foreign markets.
“What 2022 must see is for SA to speedily implement a wide range of half-forged policies and projects that will help to create a growth environment that is solid and coherent,” said Parsons.
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