Recovering SA’s lost decade

STRATEGY: THERE ARE WAYS TO RECOVER AN ECONOMY THAT IS REELING ON THE ROPES

Ciaran Ryan

Thabo Mbeki can look back on his tenure as president and rightfully say: “We never had it so good.” He would be right, of course. He was ousted as ANC president in 2009 by Jacob Zuma and it’s been downhill since then. Virtually every measure you can think of reminds us of this fact, from GDP growth to state borrowings and foreign direct investment (FDI).

Under Mbeki, foreign investment in 2008 topped $9 billion. Under Zuma – bar for two years when commodity prices were surging – it dwindled to around $2 billion. The state capture inquiry, now in idle mode, tells us all we need to know the reasons why this was so.

And while foreign investment inflows were drying up, South Africans couldn’t get their money out fast enough.

At a presentation on Wednesday on the investment protections needed to secure SA’s future in a post-Covid-19 world, Herbert Smith Freehills partner Peter Leon offered some advice on how to start fixing things.

It was, says Leon, a “lost decade” for SA after Zuma came to power, but this need not be the story of the next decade.

SA is approaching the International Monetary Fund (IMF) for $4.2 billion (about R69.5 billion) in short-term lending under its rapid financing instrument.

This must be paid off in three to five years, but chances are we will have to approach the IMF for a much larger, longerterm loan of about $18 billion to truly get the economy back on its feet and to get the fiscus in respectable shape.

The IMF’s shorter-term lending is relatively mild on conditionalities, but the longer-term loan is the one that carries the big stick.

The IMF’s Article IV report on SA, published in January this year, suggests that SA would be required to implement major microeconomic reforms, especially for state-owned enterprises (SOEs) as well as product and labour markets.

This is where it could get sticky with the labour unions, but government will be forced to take these steps and face down opposition in the ruling party.

Per the IMF script, if the economy is to grow, SOEs will have to be split up, be privatised, or weaned off the state teat.

The public sector wage bill will have to be shrunk. Labour legislation – and this is the tough one – may have to be revisited, particularly the extension of so-called bargaining council agreements that set wage and working conditions for all businesses in a sector, including those that are consulted on these agreements.

Issues such as these are cited as reasons for SA’s low-growth trap – and the IMF will want its pound of flesh.

The IMF sees decent upside for SA under a structural adjustment programme: increased per capita income, improved business environment, lower unemployment and poverty, reducing public debt from 2022, lower inflation in the medium term with a stronger rand to offset imported inflation. With that done, there should be greater room for easing monetary policy and reducing finance costs.

Leon says the way things are, he doesn’t see how government will be able to not go to the IMF for a longer-term facility.

FDI flows into SA were not helped by the department of trade and industry decision to unilaterally terminate bilateral investment treaties (BITs) with SA’s trading partners.

“If SA is to emerge from the economic devastation of the Covid-19 pandemic, it will need more than investment-friendly rhetoric from the president and his envoys,” says Leon.

He adds that even beyond implementing the structural reforms proposed by the IMF, SA will need to show a concrete commitment to the protection of foreign investors, by doing the following:

Amending the Protection of Investment Act to provide for proper investment protection;

If not joining the International Centre for Settlement of Investment Disputes by signing the Washington Convention, then entering into new BITs with important trading partners; and

Submitting itself to investor-state international arbitration.