CHRIS GILMOUR: Policy certainty key to luring investors and enhancing growth, say experts

Long-term structural reform of the SA economy, employment prospects, the high quality of the local banking industry and the debilitating Eskom rotational power cuts — these are just some of the very pertinent economic issues Mohammed Nalla of the Public Investment Corporation and Konrad Reuss, country head of Standard and Poor’s ratings agency, discussed in a lively conversation at the recent S&P DJI conference.

Inevitably, the latest crippling Eskom crisis was a focal point, and Nalla says rotational power cuts (“load shedding” in Eskom-speak) are having a devastating effect, not only on sentiment but also on the ability of companies to deliver operationally. He is also concerned that the longer we languish in this low-growth environment, the more difficult it becomes to deal with the myriad of social problems that accompany it. On our interest-rate situation, he pointed out that 15% of SA’s budget will be spent on the servicing of debt, instead of going to many other areas that desperately need it.

Nella urged the government to act on the various opportunities in the so-called primary sector of the economy, which has the capacity to absorb large numbers of unskilled and semi-skilled people. He sees big potential in agriculture and tourism, for example, and meaningful numbers of the unemployed could be quickly absorbed into the formal workforce if the government could relax restrictive practices in these sectors, especially tourism.

Nalla also criticised other rigidities that are impediments to growth. Special mention was made of monopolies and oligopolies that need to be broken up in order to liberate the economy (Eskom is an obvious one), with competition authorities constantly addressing anticompetitive practices in the private sector.

The quality and independence of institutions such as the SA Reserve Bank and the Treasury are paramount to Nalla. He questions the government’s ideology on just how committed it is to the continued independence of the Bank if it indeed believes in the virtues of inflation targeting. He wants more specific interest-rate and other policy certainties from the government. And while President Cyril Ramaphosa has signalled great intent, that will only take the country so far — what is now required is highly visible execution.

Coming from a ratings agency, Reuss was obviously keen to comment on our all-important sovereign ratings. He depressingly observed that SA is back to where it was at the dawn of democracy in 1994. S&P rates SA at BB+ on its local currency debt and BB on its foreign currency debt, both of which are sub-investment grade. He noted that the downgrade cycle began in 2012 due to a toxic cocktail of dismal growth, the deteriorating fiscal situation and the beginning of Eskom’s freefall.

Reuss also pointed to some major negatives in SA, including high inequality, extremely high unemployment, and social instability. Despite these weaknesses, S&P’s outlook remains stable. Just how long this will last is in question if the Eskom situation cannot be resolved quickly.

It’s not all negatives, and Reuss sees some positives when comparing SA with other emerging economies: it has a robustly regulated and well-run banking system; it is not highly indebted in hard currency terms; and, again, the Bank remains independent and maintains an excellent track record in keeping inflation relatively low.

However, he does not approve of the large proportion of foreigners that are invested in  SA’s local debt, as this leads to currency volatility. They view the country as a yield-seeking destination rather than one of growth.

On the hot topic of prescribed assets, he considers that to be an unorthodox method of financing, and it would not be ratings-positive.

Looking to the next few months, Reuss said confidence is crucial, and concurred with Nalla that while there is a lot of goodwill towards SA, what investors need is far greater policy certainty.

• Gilmour is an investment analyst