Good intentions need power of action to quell scepticism
When do you start pencilling “intention” into a GDP forecast and into asset prices? This is a question that will plague analysts and modellers as well as investors this year after last week’s state of the nation address (Sona).
After the ANC’s Nasrec conference and the 2018 Sona, GDP forecasts were upgraded by about a percentage point on the back of expectations of a different way of doing things and of Ramaphoria leading to improved investment and growth. That turned out to be very much premature.
Investors learnt that intent and even actual, real strong positive sentiment are insufficient with severe binding constraints on growth, as well as the fact that such changes can take considerable time.
GDP forecasts for 2018 were revised down during the year despite so many summits and announcements. Scepticism on growth and the ability to turn it has set in and was evident on meeting business leaders visiting SA recently.
Some of this is justified given that the complex and heavily interwoven nature of the binding constraints on growth means many things need to be put right first. We need to be constantly on guard against making the same mistake in the opposite direction and keeping growth forecasts too low for too long. Beyond the specific narratives of the 2019 Sona, it is clear the Ramaphosa government now has an ability to crowd-source various ideas into a speech and then into a programme for government.
The December and January colloquia as well as the Public Private Growth Initiative (PPGI) seem to have had a strong impact in this regard. One of the most radical and positive set of proposals in the address related to early childhood development and child literacy and was lifted from the contributions of Nic Spaull of Stellenbosch University during the colloquia.
Investors and forecasts are left then with a hard choice after Sona 2019. Do you give benefit of the doubt? If you do, how are you going to shift your forecast? What elements of the address equate to how much on the GDP forecast for 2019, 2020 or 2021? Does a reference to increasing the focus on exportled growth lead to a percentage point or half a percentage point on growth in the coming year?
These are important questions for the Reserve Bank and Treasury too, both setting policy off these forecasts in the coming months. There are too many imponderables, especially before the election. For me the strong commitments and intent of the Sona on growth policy adds moderate upside risks to growth in the medium run, but the chance of realising those positives is still uncertain. I think many foreign direct investments and portfolio investors come to the same conclusion.
As Stuart Theobald laid out here in November, companies at a micro level need higher returns and lower risk to get investment growth at a macro level moving.
The intent shown in the Sona has the potential to start to reduce future risk for investors, at the margin, but needs to be followed through with action and then momentum to bust through scepticism and properly adjust investor perceptions of risk-reward.
This is going to be hard. Recent announcements by Total of the discovery of hydrocarbon reserves off Mosel Bay are risky if they distract from the hard work needed to shift the underlying doing-business environment and so improve the risk-reward for domestic and foreign investors.
SA must take care not to fall into a Dutch-disease trap, and in any case such hydrocarbon support for the economy is itself uncertain, risky and probably realised only in the longer term. In the interim, the Sona identified a new way of thinking, in one specific announcement.
While the speech was full of “more of the same” in terms of sectoral focus and directed central government control on economic policy, the targeting of SA to move from 82 to within 50 on the World Bank Ease of Doing Business ranking is, for me, highly significant. To jump so many places in three years is a huge ask.
The World Bank provides specific and detailed feedback on the rankings every year, which is a template for government. Others such as the Organisation for Economic Cooperation and Development are also working on blockages in the economy at a micro level.
The Sona promise to provide a regular feedback mechanism to cabinet means there will now be no excuse for inaction. Just as the Eskom-induced “panic” created a mindset change to necessary fundamental reform, so targeting the Doing Business rankings can create a focused mindset for change and emergent growth in cabinet and the government by getting the foundational basics right.
As implementation starts, scepticism will fall away and then growth forecasts can rise in the medium run.