When the Financial Times ran with a story headlined “The bullish case for SA” last month it was tapping into something of a trend.
Local CEOs such as Nedbank’s Mike Brown have lately been putting the bullish case to investors on their post-results roadshows. RMB chief economist Isaah Mhlanga made the case at a recent Gordon Institute of Business Science (GIBS) conference.
There are permutations but the essence is that load-shedding and logistics constraints are the two big factors holding back SA’s economic growth. But reforms to address this are under way at last. The private sector has been racing to install renewable energy generators since the government opened up the market. We are already seeing the effect in reduced load-shedding. And there is at least 7,000MW more of utility scale private sector electricity under construction.
The Reserve Bank estimated that last year’s record load-shedding cut the economic growth rate by two percentage points. In other words, we could have grown by 2.6% instead of 0.6% in 2023. This year the Bank estimates load-shedding’s impact will reduce to 1.5 percentage points. Fix the problem over the medium term and you get higher growth rates than the 1.6% average the Treasury pencilled into its budget projections.
Likewise logistics. Stellenbosch University’s Jan Havenga has estimated the induced cost of Transnet’s dysfunction shaved 6% off the absolute level of GDP in 2022, most of that because of rail. But SA has seen the worst of it, as the FT puts it. New leadership at Transnet and collaboration with the private sector is starting to turn the place around. And the government is now opening up to private sector participation in rail and ports, just as it did in electricity. Add that 6% back to the economy and you get a higher growth rate.
Then there are various other bullish factors to throw into the mix — lower inflation and interest rates should boost consumer demand, reducing electricity and logistics constraints should boost investment, stabilising the public debt could reduce borrowing costs, and so on.
The bullish bottom line is SA could quite easily see growth rates of 3% or more as the Ramaphosa administration’s reforms finally start to make a difference. At these levels the economy starts creating jobs on a meaningful scale. SA looks far more attractive to investors. The fiscal arithmetic changes quite dramatically for the better, with growth itself stabilising or even reducing the public debt ratio.
“We looked at what growth rate gets you debt sustainability: we think 3% gets you going,” Citi economist Gina Schoeman told the GIBS conference.
There’s just one problem: nobody believes it. Nedbank’s own forecasts are for the economy to grow by just 1%-1.5%. Says Schoeman: “There’s not an economist out there who thinks SA is at 3%-5% over a three to five-year period.” And who can blame them?
SA has grown at an annual average of just 0.8% since 2012, just half the population growth rate. Quadrupling that still seems fanciful, sadly. And the realists would point to the risks, here and abroad. Our own elections have the potential to derail the reform process, and to renew pressure for public spending. Globally, elections and geopolitical tensions have the potential to make life tougher for economies such as SA’s.
Even for those who do believe the bullish scenario, it’s no quick fix. Those reforms take time. Maybe a lot of time. Mhlanga points to the 71% success rate on the presidency’s Operation Vulindlela reform scorecard. Arguably though, those structural reforms are just that — structural. They are policy and regulatory changes that have to be implemented by government departments and public entities. You just have to look at some real-world examples to see how slow and tortuous that process can be.
Transnet chose Filipino giant ICTSI to operate its Durban port container terminal last July: it now doesn’t expect to actually sign the contract until this July. Meanwhile an unsuccessful rival bidder, Maersk, has jumped in to take the whole thing to court.
The past week’s skilled work visa debacle was another reminder of how messy the reform process can be. Legislative reforms have been enacted in the water sector but water could still be SA’s next economic crisis. And the key impediment to the reform process is still the capacity of the state, which could go either way in the next administration.
Public finances
But let’s be brave (or naive). Investors are consumed with worst-case election scenarios: a reassuring outcome could see a bounce in confidence. If we assume the post-election continuity that is most economists’ base case, we could start to see that bounce in the growth rate materialise in the next two to three years. The question is what happens in the meantime, particularly to public finances.
The February budget might have pencilled in spending cuts that put the government on the path to stabilising its debt over the medium term. But it’s hard to imagine it will be able to stick to the spending restraint (we’ve already seen it announce one unbudgeted social grant increase). Its borrowing needs, and borrowing costs, are likely to keep climbing over the medium term, until that 3%-5% starts to kick in to solve the debt problem.
In the meantime it could become ever more likely that the government might resort to more “financial repression” — finding ways to force banks and other financial institutions to route capital into government bonds or other public sector assets. That’s the kind of scenario that worries bankers, which is why they very much hope the bullish scenario will materialise, and sooner rather than later.
So do we all. The prospect that SA could still be growing at just 1% a year in five years’ time is just too bleak to contemplate.
• Joffe is editor-at-large.
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