Let’s get down to planning our country’s comeback
IT IS easy to become pessimistic about South Africa’s stagnant economy and weak governance – it would be delusional not to acknowledge it – but we should not let that stop us from planning our comeback. Practical steps are being taken, and some have yet to be taken, to enable our recovery and to facilitate a return to the kind of responsible governance and policy certainty that will drive job-creating growth.
The current situation is indeed dire. Gross domestic product (GDP) growth has slowed to 0.8 percent and is expected to recover incrementally, reaching a pedestrian 1.9 percent in 2020. This weaker growth reflects a massive, ongoing deterioration in business and consumer confidence.
As we all know, weak growth also results from increased risk and lower credit ratings, higher bond yields and lower investment. Lower commodity prices have further impacted our growth rates.
Governance and factional political issues have also weakened our economy. The drop in investor confidence and subsequent ratings downgrades were likely informed by the cabinet reshuffle at the end of March 2017.
There is a positive side, though. Despite a difficult global and domestic environment, the economy is at least recording positive growth, although still at a very low level. South Africa is still a young democracy developing its institutional strength and capability, yet remaining resilient in the face of global and domestic challenges.
Regulated The banking sector also has a good story to tell. It remains profitable, well managed, robustly capitalised and regulated in line with international best practice.
Our banking system compares favourably with those of industrialised countries, and in 2016/17 was ranked the second most sound in the world in the World Economic Forum Global Competitiveness Report.
Capital adequacy ratios are significantly above Basel III requirements, underpinned by strong profitability, solid capital buffers and a consistently prudent approach to capital management.
Banks continue to record healthy profits, reflecting the resilience of their earning profiles, driven by cost containment measures.
Concentration of assets in our five largest banks is now around 90 percent. The concentration of the industry does have its advantages, but has been raised as an issue within the context of the challenges of economic concentration in the South African economy. The industry is engaging relevant stakeholders on the potential of diversifying the industry to enable broader ownership of appropriately regulated financial institutions.
A key event for the South African financial services industry this year was the promulgation of the Financial Sector Regulation Act – the legislation often referred to as “Twin Peaks” – which established two new financial sector regulators, the Prudential Authority and the Financial Sector Conduct Authority.
The effectively run financial system stands ready to leverage growth impetus when it returns, but there are structural challenges that must also be addressed. These arise from our history as well as the complexities of reintegrating into the global economy. Among these is the lack of competition in the product and labour market, which impedes growth.
The product market is also highly concentrated and needs reform to expand the space for small and medium enterprises to increase their participation in the economy.
The Black Business Growth Fund, an initiative by the financial sector, aims to address this. The fund’s significant resources will be invested into black-owned businesses to help diversify and transform the business sector. Hopefully, this will lead to growth and job creation.
In the labour market, there is a need for innovation around the wage bargaining process to improve relations between workers and employers, and the efficiency of negotiation, and to encourage job creation.
Although mining is no longer as significant a contributor to the GDP as it once was, it is still responsible for 8.1 percent of GDP and remains a key source of foreign exchange earnings and employment.
The Mining Charter remains in legal limbo and needs to be finalised if we are to speedily resolve uncertainty regarding black ownership and participation.
With South Africa’s tertiary economy responsible for almost two thirds of our GDP, the service sector is rapidly growing in significance. This indicates that the banking sector will continue to play a critical role in future.
In our state-owned enterprises there remains ample room for initiating better governance and co-operation with the private sector. There are also serious structural problems in these institutions that need to be resolved, in addition to the leadership and policy uncertainty relating to the ruling party’s electoral conference. Once these are resolved, the country will be ready for take-off.
The conditions for success and growth are clear and established. We have a strong legal and judicial system designed to hold stakeholders to account. We have a strong constitution, which safeguards the rights and the rule of law. We have a sound and independent central bank, which has implemented our inflation targeting policy since 2000. In forums like Nedlac, the transformation hearings in Parliament and the CEO Initiative, government, business and labour have been working together to improve relations, restore confidence and boost investment. It is urgent that this helps us unblock impediments to faster growth and employment in key sectors. Nowhere is this need for employment greater than among our youth, where the unemployment rate is officially at 38.6 percent.
Commitment If we do not unlock the potential of our youth – through effective, relevant education, skills and job opportunities – the socalled “youth dividend” becomes a “youth liability” and a ticking time bomb.
On the government side, we need to see fiscal and regulatory reforms in stateowned enterprises, as well as a commitment to ethical governance.
These are very real challenges to growth, but for all the hurdles, South Africa remains a healthy, young, resilient and vibrant democracy. We have the institutions, the expertise and the economic infrastructure to enable a rapid and sustainable high-growth trend. If we are honest with ourselves, we know what needs to be done. All that is required is the political will to work in the national interest and do it.
There are very real challenges to growth, but for all the hurdles, South Africa remains a healthy, young, resilient and vibrant democracy.
Cas Coovadia is managing director of the Banking Association South Africa. The article is based on a recent speech delivered to a conference on financial and economic matters hosted by the South African Embassy in Rome.