PETER ATTARD MONTALTO: SA contradictions vs the way forward for the economy

Posted in: i-Blog, South Africa on May 27, 2019

NHI, Reserve Bank nationalisation, the Mining Charter, the Credit Amendment Bill and the manner of land reform are but a few issues that could stand in the way of growth-inducing reforms

This column was first published in Business Day

SA is full of contradictions and things that don’t make sense. It will be the job of the new administration — in the process of being appointed as this column goes to press — to pick at these knots.

Firstly, what are the binding constraints on growth and how are these nested inside each other? The year 2018 showed that growth was harder to kick-start than expected. Removing “negatives” was not sufficient and whilst sentiment improved, animal spirits did not return. (Economist John Maynard Keynes coined the term “animal spirits” to refer to emotional mindsets.) The first quarter of 2019 was the same, masked by load-shedding, underlying growth would have actually been exceptionally weak anyway even if there hadn’t been load-shedding.

A further improvement in sentiment after the elections will not cause growth and the resumption of animal spirits without someone opening the taps. Given the constraints on the fiscus and monetary policy, that is going to have to be banks. However, bank cost-cutting and risk aversion are likely to mean a large-scale leap higher in credit growth is unlikely.

Banks did not come to the party in 2018 and so credit growth dropped to only 5.6%,  the weakest since 2011. We see it only recovering to 6.4% growth in 2019 . Credit booms can be unhealthy and are unsustainable, but are a useful bridging mechanism before the impacts of structural reform can take root.

Two other binding constraints are skills and electricity, and these show further contradictions here. If the economy couldn’t find the skills when it was growing at 1%, how will it find them quickly enough when growing at 2%, 3% or 4% ? Education and skills problems in the country are eminently solvable — but it takes significant time. The quick fix is importing large numbers of skilled immigrants (including into key state-owned enterprises management) — and is yet again (as I’ve written here so often) why the visa issue will be the key issue to watch.

The same is true for electricity. With the system unable to cope at 1% growth, how will it cope with faster growth? Yes, we will have more Renewable Independent Power Producer Procurement windows from later in the year and an Integrated Resource Plan eventually, but with no new investment since 2014 it will take at least 18 months to start seeing new capacity. New capacity from Medupi and Kusile will come on-stream but with required mothballing of old plants and efficiency issues of new units running anywhere near their nameplate capacity, so that is not a silver bullet.

In 2018 also taught that clean-up was not sufficient for growth. This needs to be borne in mind in the coming year as we see a fresh cabinet that is clean as necessary but not sufficient for growth. The far more important qualification will be implementation skills, raw management capability and the ability to manage change.

The point here is that if positive change can come, the constraints of growth will take time to be lifted.

The economy is basically in a kind of South African-style Japanese deflation, with low growth reinforcing low expectations and reinforcing risk aversion, and that in turn reinforcing low growth.

The Public-Private Growth Initiative process on the surface is another form of statist Industrial Action Policy Plan-style command and control, yet is possibly one way to kick-start things. But it is not a sustainable way of running an economy and risks reinforcing the same statist mindset into policy-making.

The next contradiction is that SA has no growth, yet it has all the right plans. I think one of the most negative things we could see from the new administration would be the announcement of a new economic plan formation process involving more summits. All plans are already on the table. There is always an obsession within ANC circles of finding low-hanging fruit that no one else has thought of. Indeed, I’ve often been interrogated by ANC members as to some secret growth-boosting policy that for some reason is being kept secret …

That ultimately comes back to mindset and the need for implementation. A reformed presidency may be able to shift the dial somewhat but capacity constraints and vested interests will come back to bite. Hence a running jump on implementation is needed.

In the coming months, we need to be careful to split PR from substance, policy from implementation. This will be most critical with Eskom but also visas and other reforms. We should also be cognisant to consider reforms in “net” terms. In other words, two steps forward can be offset by a step backwards.

This is especially true of the National Health Insurance, Reserve Bank nationalisation, the Mining Charter, the Credit Amendment Bill, prescribed assets and the manner of land reform.

“Negative reform” to coin a clunky phrase, can hold the economy in this South African-style Japanese deflation. Adding in political contestation and factionalism can only make those issues worse,  as well as 19 extra EFF MPs. Such issues can’t simply be kicked into the long grass.

Investors are surprisingly sceptical, seeing my view that we get back to 2.0% growth in three years as rather bullish! A poll of investors Intellidex conducted before the elections showed only a one-third probability of successful implementation of meaningful growth-boosting reforms in this parliamentary term. Investors have seen already strong PR and a glossy message during interactions with the president but been more sceptical about the substance. The same is true of local businesses as well when the supportive veneer is peeled back.

Growth is hard. The global environment is making it doubly so. SA doesn’t need a long walk to reform but, with a wild run and jump towards the goal. It’s now or never.

• Attard Montalto is head of Capital Markets Research at Intellidex.

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