PETER ATTARD MONTALTO: Economy is in ICU and social compacting delays the treatment

Posted in: Economics, i-Blog, Politics on July 1, 2019

Other countries are gaining an advantage through faster policymaking, and the government seems oblivious to how negative the constantly deteriorating sentiment is

This column was first published in Business Day

Can you suffer death by social compacting? It seems the answer may be yes.

I am not talking about the mind-numbing circular arguments that go on year after year in Nedlac, though this is certainly an issue. Instead the mortally wounded patient is the economy.

Having just returned from a week poking around the public and private sectors, I’ve been surprised by the degree of negativity there is, but more by the fact people seem to be getting more negative still and more entrenched in their positions.

There seems to be a lack of understanding within Pretoria of how bad the sentiment is. But more than that is the fact it’s getting worse and needs to be urgently addressed.

Social compacting on all reforms, in addition to political noise, creates lengthy delays that are interpreted as policy uncertainty.

A broad strategy may well be in place to do all the right things over a 10-year, two-term period but this does not address the short-term problem of turning sentiment.

A common line from the government is “trust us”. I am increasingly convinced there is now a significant trust deficit between business and the government and that saying this harms rather than helps sentiment.

A new administration should ideally be able to garner trust and have time, but this one doesn’t, given its previous period in power and the party’s length of time in power. More than that, though, is the open squabbling and cross-lobbying on policy issues that is damaging, Eskom being the primary example and the case with the most important risks.

Infrastructure fund

This is not to say that growth won’t naturally recover somewhat from about 0.5% in 2019. Nor is the issue especially how fast that happens. The real question is where growth will recover. As the president highlighted, positive per capita income growth is required, after being in negative territory for about seven years. This would imply headline real growth of more than 1.6%.

Some things will help us get there. The new infrastructure fund is one, but as infrastructure is import intensive and a sizeable portion of those projects for the next five years would have happened anyway, 10 percentage points of GDP growth over five years should not be pencilled in simplistically and out of the blue.

Social compacting on all reforms, in addition to political noise, creates lengthy delays that are interpreted as policy uncertainty. It means negative sentiment becomes more negative in the interim, and when reforms are implemented there is the strong risk that growth does not rise as much as hoped for.

On specific issues, however, social compacting and politically sensitive reactions can be more significantly damaging. This is where strong and immediate leadership is required, key principles espoused and stuck to, and red lines put in place.

SA needs to run just to stand still. It cannot spend much time on a strategy of waiting out opposition through a social compacting process as sentiment and therefore growth is being held back further.

Clear direction required

This is not to say that social compacting has no place. Highly complex long-term shifts in economic strategy such the Just Energy Transition is one such example where this is needed. However, shorter-run policy is not, skills visa issues being a crucial example.

Equally, on key “fallout risk policies” public debate has to be very carefully managed, and clear direction is required. That doesn’t mean consolidation doesn’t occur but the formalised process of open-debate compacting can create huge problems for sentiment even if negative policy changes do not eventually occur. Key examples are prescribed assets, some aspects of land, National Health Insurance and numerous issues swirling around the Reserve Bank.

SA is operating in a dynamic competitive global landscape in which other countries are gaining an advantage through faster policymaking, let alone better policy. SA will continue to lose global market share without appropriate, timeous reforms.

This is especially vital with the advent of the fourth industrial revolution, which will cause a rapid decrease in the quality-adjusted cost of production for goods and services outside of SA, putting the economy at a disadvantage and boosting imports and the current account deficit.

In this sense, policymaking is being played out as a domestic game, unchanged largely since 1994, when in fact it needs to be viewed as multidimensional international chess.

A few small areas for the deployment of political capital without social compacting need to be found for rapid policymaking and reform implementation that keep pace with the international chess game. Skills visa issues are key, alongside shifting the style of debate about some of these key issues.

Otherwise, even as reforms eventually occur, sentiment will barely shift and potential growth will not rise as the reforms are offset by the loss of competitive advantage and population growth. Growth will thus only barely recover to 2%, let alone 3%.

• Attard Montalto is head of capital markets research at Intellidex.

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