There’s a chance of an economic silver lining to the Covid-19 cloud
It is not news that the Covid-19 pandemic is having a catastrophic effect on SA’s economic growth prospects. Business knows it, as evidenced by the release earlier this month of the lowest-ever RMB/BER business confidence index figure. To prevent severe economic decline we need to rethink our economy and identify measures to resuscitate it post-Covid-19. An imperative is to entice more local and global businesses to invest in SA, and to do so the country must rapidly commence implementing mechanisms to attract more foreign direct investment (FDI). In the first part of our democracy, SA saw a widening of foreign investment protection, and from 1994 to 2009 it signed 49 bilateral investment treaties (BITs) and ratified 22. Each included the classic investor protections. In 2008 SA ratified the Southern African Development Community (Sadc) Protocol on Finance and Investment, which entitled investors from anywhere in the world to most of the typical BIT standards of protection after exhaustion of domestic remedies.
However, with the advent of the Zuma administration, SA began to see a narrowing of foreign investment protection. After a review but no consultation, the department of trade and industry (DTI) started unilaterally terminating SA’s BITs with EU members and Switzerland. Importantly, however, these BITs contain survival clauses, ensuring any investments made before the effective date of termination will remain fully protected for a “sunset period” of 10, 15 or 20 years.
Presented by the DTI as a substitute for the terminated BITs, the Protection of Investment Act, 2015, effectively affirms that foreign investors will not be afforded any greater legal protection than that enjoyed by domestic investors under domestic law. The DTI also spearheaded a review of the protocol, with the result that it no longer affords protection to foreign investors generally but only to investors from other Sadc states. The cumulative impact of the Zuma administration’s measures was to dilute the legal protection afforded to foreign investors. Annual FDI inflows followed a steep downward trajectory from 2009. SA’s GDP growth rate followed a similar trajectory.
While the investment landscape appeared to shift once again in a positive direction with President Cyril Ramaphosa’s assumption of office, given SA’s economic fragility the government is rapidly running out of fiscal headroom. It has already approached the IMF for a loan under its Rapid Financing Instrument. But analysts suggest this is only a precursor to a full IMF programme and SA may find itself, in the next five years, with little choice but to approach the IMF for long-term assistance in the form of an extended credit facility or standby arrangement. These facilities, which could give SA access to up to $18bn, are typically conditional on the implementation of extensive structural reforms.
The silver lining of the current malaise is thus that it may prompt and hasten the kind of structural reforms that have been thus far resisted by the government. These microeconomic reforms — in particular, liberalising the labour and product markets, and at least partly privatising electricity, rail and port networks — hold the key to SA overcoming the legacy of the “lost decade” since the end of the
Mbeki administration in 2008. However, it may be difficult to reach agreement on the terms of any programme as the conditions which would accompany it conflict with the ANC’s post-Covid-19 economic reconstruction, growth and transformation plan.
If SA is to emerge from the economic devastation of the pandemic, it will need more than investmentfriendly rhetoric. The government will need to show a concrete commitment to the protection of foreign investors by amending the Protection of Investment Act to provide for proper investment protection; and if not joining the International Centre for the Settlement of Investment Disputes, then entering into new BITs with important trading partners. An alternative to the negotiation of new BITs with EU member states would be for Ramaphosa to withdraw the notices of termination sent by the Zuma administration.
Following the global economic decimation wrought by Covid-19, the investment landscape is more competitive than ever. Investors are not likely to come knocking on our door without knowing that a willing and investor-friendly host is waiting on the other side.