SA’s two biggest challenges

When Cyril Ramaphosa took over as president of South Africa earlier this year, many analysts were expecting an immediate turnaround in the country’s economic fortunes. Some boldly revised their 2018 growth forecasts upwards, anticipating a boost in business confidence.

However, it has proved to be not quite so easy to re-ignite the economy.

“What we naively believed is that you can turn South Africa around very quickly,” Stanlib chief economist Kevin Lings told the Allan Gray Investment Summit in Cape Town on Tuesday. “But it’s going to take a long time. We have to be realistic.”

While Ramaphosa has begun a process of addressing the most pressing issues in the country, the challenges facing South Africa are extensive.

“There are two sets of challenges as I see them,” says Lings. “At the moment we are dealing with the first set, which is where the focus of the media discussion and political debate is.”

These are the immediate issues of boosting business confidence, restoring fiscal discipline, reforming state-owned enterprises, implementing clear transformation policies, and dramatically reducing corruption.

Addressing these are critical in the short term. However, Lings argues that it is the longer-term challenges that will really determine South Africa’s future.

“In my mind there are two really big obstacles that South Africa has to overcome,” he says. “We need to get an education, and we need to employ people. You do those two things and a lot of other things immediately get better.”

He believes that every policy in the country should focus on those two variables.

“The more you improve these, the bigger the difference you make to everything. You name an economic or social problem in South Africa, and addressing those two factors will deal with that problem – especially creating jobs. Job creation is the most powerful economic factor you can have in an economy. If you want to get your economy vibrant, just give people a job.”

The country’s education problems are both at basic and tertiary levels. At school level, it is most clearly illustrated by the fact that only half of the children who enter school end up with a matric, while at tertiary level only 17% of students who enter universities graduate with a degree.

When it comes to unemployment, Lings points out that the number of unemployed people in South Africa will continue to rise unless the country is able to create 600 000 jobs a year.

“How fast do we have to grow the South African economy to create 600 000 jobs?” Lings asked. “It has to be over 4%, and ideally up at 5%. Then the number will stop going up.”

Given this reality, many have turned to the government, expecting it lift the growth rate. However, the state’s current level of indebtedness means that it has run out of levers to pull.

“Government quite simply is not in a position to drive this economic growth,” Lings says. “They don’t have any more money. You can’t expect the government to lift South Africa’s growth meaningfully by simply spending money, because there is no more money.

“So where does that growth come from?” Lings asked. “It has to come from private sector investment.”

This is recognised by the government itself. The National Development Plan sets a target for private sector investment to be 20% of GDP. That is the accepted level of investment needed to generate growth of 5% a year.

However, private sector investment remains well below these levels, and in many sectors is declining. Corporates on the whole are not engaging with the economy on the scale required.

“So what is the most critical thing holding back the South African economy?” said Lings. “Effectively, we are just not happy. If you want to get companies to engage, get corporates investing, the key is business confidence.”

Over the last eight years, business confidence in South Africa has been below average. The question is why Ramaphoria hasn’t changed this.

“The reason, I think, is that we are too worried about politics,” Lings said. “Cyril Ramaphosa first wants to win the election next year. Then he will have a better power base. Then he can fix this. But until the politics moves, the levels of confidence in South Africa are going to struggle to generate the 4% to 5% growth we need.”