Tragedy is, we have the capital
Ilove newspaper posters. A few weeks ago I saw one that read: “The end of Ramaphoria! — GDP falls 2.2%”. This week, a Business Day street-pole poster read: “Battered rand is back at Zuma-era levels.”
Poor former president Jacob Zuma has clearly cemented his status as the yardstick for underperformance.
These two posters got me rethinking the fundamental problem with our economy, especially when it comes to levels of investment by the government and business.
South Africa clearly still faces challenges that question the sustainability of the economic trajectory it is on. In summary, these relate to poverty and unemployment characterised by inequality, where the black majority are poor and the white minority and a fraction of black people are rich.
Principally, it is the country’s ability to generate long-term, sustainable and inclusive economic growth that is paralysed by these challenges.
Public sector policy has to date failed to stimulate sustainable growth in the country — although not for lack of trying. After the global financial crisis, numerous programmes have been introduced with the aim of cultivating activity and the conditions for growth.
The policies have had mixed reactions. The National Development Plan solicited broad support from the private sector while being criticised by some of the governing party’s alliance members. The same happened with National Health Insurance, the Mining Charter, the National Minimum Wage Bill. The list goes on.
One can say, well, that’s the nature of democracy — things are debated. Unfortunately, if the debate is between those seen to be in power, it raises doubts about how clear they are about the right policies that will inspire investment and therefore grow the economy.
In addition to efforts on the policy front, the lack of capacity in implementation by the government has exacerbated the challenges. There has not been tangible progress in bringing many very good policies to life in the manner envisaged.
Then there is business. The mindset and outlook of the private sector demonstrate a general lack of confidence in their own country. Ramaphoria or no Ramaphoria, business is simply not investing enough in South Africa. It has been reported that the nonfinancial corporate sector had accumulated R722-billion in cash deposits as at end-2016.
While there will continue to be debate regarding the authenticity of the concerns of the private sector, this mindset becomes a self-fulfilling spiral, with low confidence leading to lack of investment and, ultimately, lower realised growth. This affects employment, productivity and confidence in individual organisations as well as leading to a broader malaise.
An interesting irony in this dynamic, which could be characterised as a lack of patriotism, is the continued investment in import-facing capacity such as warehousing facilities. This trend acknowledges the inherent demand for goods and services, but the private sector would rather utilise import channels to satisfy this demand to the immediate detriment of local industry.
Recently, an asset-manager friend told me about a study done by the CPB Netherlands Bureau of Economic Policy Analysis, which examined the impact of domestic pension savings on economic growth in OECD and non-OECD countries. The study found supporting empirical evidence that an increase in pension savings had a positive impact on economic growth. The mechanism for this link was the availability of capital that companies could access and thus drive economic growth.
In South Africa, a large portion of pension savings is invested domestically in the capital markets. The equity capital markets are an interesting case study of the challenge arising. The mindset of the management teams of listed companies results in capital either not being invested or being invested outside the country. This effectively robs the country of the very capital seen to be a mechanism for growth.
There are regulatory frameworks within which pension assets are invested in South Africa. Regulation 28 of the Pension Funds Act specifies the asset classes permitted for investment and the limits in each. The challenge arises where a number of the asset classes feed into the very structures that are controlled by management with a negative mindset. Further, there is no structured mechanism to facilitate investment into the small and medium sectors.
Our country does not suffer from a lack of capital. It suffers from suboptimal allocation of its capital. Doing more of the same isn’t going to change anything.
Ramaphoria or not, business is simply not investing enough in SA