SA is between a rock and a hard place. It has been there before but this one has all the appearances of a looming iceberg. The economy is in the doldrums, GDP growth has been negative this last quarter and forecasts show that it is unlikely to exceed 1% in 2017. Confidence is low, business is not investing, the current account remains negative and unemployment has risen to more than 27%.
Foreign direct investment fell $4bn to $1.8bn in 2015. It grew to $2.4bn in 2016 but that is cold comfort as it remains almost 70% below the 2013 inflow of $8.3bn. South African companies are investing more abroad and holding cash there.
These facts indicate that there is a lack of confidence in the South African economy by both domestic and foreign investors. This is hardly surprising. While the country occupied the 11th position out of the top 25 rated countries in the AT Kearney FDI confidence index in 2012, it dropped to the 13th position in 2014. It was not included in the 2015 ranking at all but now has taken back 25th spot.
SA’s has also declined on the 2017 Fragile States Index. Ten years ago, SA was ranked in the stable category, but now falls in the elevated warning category. A snapshot of the ten-year trend shows that only Libya, Syria, Yemen and Mali have had a worse marginal change. It is hardly surprising that the three key ratings agencies S&P Global Rating, Moody’s and Fitch have all downgraded SA and have it on a negative watch.
Have we reached the bottom or can it get worse? Recent forecasts made by economists are not encouraging, pointing towards slow growth for the period to 2020, possibly reaching 1.5% and at a stretch 2.0% at best. However, at least this is not a crash or a full-blown recession. It is pedestrian growth and will create no more than about 1-million jobs. Standards of living will not improve and unemployment rates will keep increasing to 30%. The exchange rate will continue to deteriorate gradually over the period.
This situation is uncomfortable but probably manageable. However, the future could be far worse. A perfectly possible scenario is that SA could fall into a full recession in 2018. The economy could shrink 3% in 2018 and continue to shrink at a slower pace for the next two years. Very few jobs would be created and unemployment would reach levels close to 33%. The exchange rate would fall to R20 to the dollar or worse.
SA has tended to blame international events for its problems. It is true that these have played and could continue to play a role. However, local policies and uncertainty are to blame for most of the country’s problems. The scenario outlined above could easily occur if corruption at the top is not stopped once and for all.
Some or all the following could cause confidence to evaporate. Any move to nationalise the Reserve Bank and change its mandate and implementation of the mining charter would be near the top of the list of events leading to economic destruction. More state capture and corruption and pressure on the Treasury to spend more and bail out state-owned enterprises would add to the potential powder keg.
The fact is that the state cannot finance economic growth. The only solution is for SA to make itself attractive to domestic and foreign business investment. The country is at present far from achieving this goal.
Are we prepared to make a clean break with immediate past policies and move the country towards a brighter future for all? This will take radical change. These are not difficult but they present a radical change in approach and philosophy. Leadership and the government must recognise that economic growth is the only way to true individual economic freedom, transformation and equality.
Success will depend on re-industrialisation and releasing the industrial, manufacturing, agricultural and mining promise of the country from the shackles that prevent them reaching their full potential. The challenge is to roll back and radically change some much-loved policies that are the shibboleths of many failed states.
Leadership must unequivocally lead the country away from interventionism and state capture; remove barriers to market entry and foster a spirit of unity and co-operation; adapt or withdraw well-meaning policies that restrict fair and equitable purchasing and labour market practices that lead to low productivity and loss of efficiency; eradicate graft and corruption; adapt land reforms to cater for the requirement that agricultural production be secure; privatise or form public private partnerships for many state companies and assets; and ensure that a large segment of education moves its focus from an academic orientation to a vocational skills-based approach to cater for the needs of an industrialising economy and much of its population.
Policies often have unintended consequences that benefit the few but in practice make matters worse for the poor and unemployed. The country can no longer afford parasites plundering its coffers, milking the state and feeding off the poor. The government and leadership must stop cutting the cake and instead start baking it; otherwise there will not be enough to share.
Infrastructure development is critical and a sound energy policy a prerequisite. For economic growth to be possible, SA needs stable electricity supply giving the wheels of industry and growth security of supply at the lowest economic cost. In this country, the only economically competitive energy sources capable of fulfilling these conditions are nuclear and high efficiency, low emission (hele) coal.
The US administration is not only rebuilding its nuclear and fossil fuel energy resources but is set to encourage the World Bank to finance clean coal plants in developing nations. The Obama administration also viewed clean-coal technology favourably in developing countries. Europe, and particularly Germany, are reducing their stringent requirements following the failure of its energiewende policy. Australia is grappling with a major economic crisis caused by wind energy.
South African energy authorities should be focusing on providing SA with the "necessary conditions" for economic growth and taking advantage of some of the changing global realities and policy changes. A more positive energy plan will encourage business to take a more optimistic view for their development and growth. The Electricity Intensive Users Group (EIUG), for example, representing businesses responsible for using 40% of SA’s electricity, is quite correctly taking a cautious view of electricity demand in future. This is not good news for economic growth. The "necessary and sufficient conditions" can only be met by meeting the challenges above.
Is high growth possible? The Association of Southeast Asian Nations, India and China are aiming at growth of more than 5% a year over the next 10-20 years. Not surprisingly, this growth is underpinned by their reliance on coal and growth in clean coal technologies and other fossil fuels. With all its natural riches resources and treasures, SA has an equivalent potential.
Unless SA works towards meeting the above challenges, SA will face a dark future literally and figuratively.
• Jeffrey is a former MD of Econometrix and an independent economic risk consultant.
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