SOMETHING very subtle but important has
started to happen with foreign investors. The trigger was the recent
unemployment data, after the good news of a stay of execution from
Moody’s. Foreign investors started to sit up and think about what has
happened in the five months since Nenegate (the events were actually
five months apart to the day) and what this lack of real (growth and
potential boosting) action would mean for labour data and the economic
outlook more generally.
Investors realise there has been a shift to greater fiscal conservatism and continue to appreciate the Reserve Bank’s credibility, but what is interesting to investors is the long-term growth narrative.
We need to define our terms very carefully here — action from a foreign investor’s perspective means: were there concrete deliverables, actionable timelines produced and meaningful steps to boost future growth in the past five months?
Indeed, net, were more steps taken forward than back in terms of specifics of legislation and regulation?
This has not been the case — no actionable, highly specific, time-tabled and road-mapped policy outcomes came from the recent interactions between the president and business — with the welcome exception of the small and medium-sized enterprises fund — although the group had several months to produce proposals, timelines and road maps. We should have had a list of specific regulations being unlocked to reduce uncertainty.
I was genuinely disappointed at this outcome. I had raised my expectations.
I thought after Pravin Gordhan had laboured the point at the end-of-fiscal-year news briefing at the South African Revenue Service that, from his roadshow, there was a strong feedback that investors wanted to see specifics and they would be produced at this meeting. This would have allowed a slice of sentiment to be unlocked to stabilise growth (albeit at low levels).
The question surely is why these specifics could not be provided.
The simple answer is that there is a lack of politics and leadership for it to happen even under the economic pressures of large-scale job losses and a contraction in the economy in the first quarter.
There seems to be a degree of concern inside the body politic over being held to timelines — that they create tension and are then a source of criticism when they are not met. This seems to miss the point — to get stuff done, the application of a liberal dose of leadership (and political capital) is required precisely because tension and criticism need to be overcome.
What is left then is hope, some notion of esprit de corps, a collectivism that is summoned. Business Day’s recent editorial (The big ‘Team SA’ delusion, May 11) perfectly described this as a "vacillating mirage".
The problem here is not SA’s strong sense of self-worth or national pride.
The fact is that these alone will not solve SA’s problems or convince investors that the appropriate steps are being taken. At best, some short-lived optimism and sentiment can be unlocked, leading to slightly faster, low-potential growth, but it does not do the heavy lifting required to boost long-run potential growth.
Such a strategy is fine as a stopgap between crisis and implementation, to provide a bottom under growth and job creation, but the question is what that implementation will be and if it will come at all.
I think SA is facing a problem in this regard. Investors hit the highwater mark of buy-in on this Team-SA strategy after Gordhan’s roadshow, but such buy-in has ebbed as investors, independent of the ratings narrative and events, have wondered what is going on in terms of real, difficult reforms. Here we need to focus on some of the specifics that have been enacted. Most stark has been the passing of the Expropriation Bill, just one day before the budget, adding to, rather than subtracting from uncertainty for investors.
Then there are the Mineral and Petroleum Resources Development Act amendments, which were promised to be passed (and subsequently promised to be split into three, covering mining, oil and gas), but have basically been destroyed by the new mining charter just published by the Department of Mineral Resources.
Then there are conflicting messages on public-private partnerships from different parts of government in an environment in which parastatals seem to be so constrained in funding terms that they are not really thinking of expanding their investment options, but hunkering down with existing investment pipelines.
The point is while the government has sent a message that it aims to drive forward, on balance, action has been mixed.
Ultimately, investors who bought the dream to begin with may rapidly let go as data and actions disappoint.
My biggest fear is actually "okay", which is unfortunately my forecast.
I am turning out to be quite a bull for this year at 0.9% (with risks to the downside admittedly) and 1.5% for next year.
I think there is a risk of the narrative getting lost in the triumphalism of such "okay" growth and, possibly, S&P and Fitch following Moody’s example and not downgrading SA’s rating next month (even if they do end up doing so in December).
The risk is that people look at 0.9%, a very weak first quarter and then a small rebound in the second and so no recession, and think nothing needs to be done. The political capital required to make difficult policy decisions, or at the very least, stabilise things, risks being diluted with "okay" growth numbers.
This would miss the point that even at 0.9%, there will be virtually no jobs created this year overall, and declining per capita incomes. It would still feel like a recession. We have to keep that focus on jobs and growth levels to be able to deliver SA’s developmental needs.
The deeper issue here would be to mistake a deep resilience in the private sector in output terms (although shedding jobs) for dynamism in the economy, or higher long-run potential growth.
I believe (and this is why I am, marginally, more optimistic on growth than many) that the private sector is able to take sharp political shocks and absorb a large part of them, given strong corporate deposit levels, decent governance and a lack of (specifically foreign exchange) leverage.
However, while this could help avoid a recession and provide a floor under growth rates, it cannot drive growth in the long run or create new jobs in new sectors of the economy. In turn, you are not getting the multiplier effects into consumption, taxes and beyond. As such, potential growth in the very long run is (optimistically) 2.5% and cannot move higher, long-term projections of unemployment remain sticky at the current level. This is where the focus should be — on the long run, taking the difficult decisions to get us there. Just hoping for a rebound next year is not enough.
Highly specific, credible, published, time-tabled, road-mapped and costed actionable plans are required to do this in difficult political areas such as mining, land, education and skills, small and medium-sized enterprises and labour laws. If these are produced, the "Team-SA" esprit de corps could tide the economy over until structural reforms bear fruit. Foreign investors will buy into this and invest.
• Attard Montalto is senior emerging markets economist at Nomura International in London
Investors realise there has been a shift to greater fiscal conservatism and continue to appreciate the Reserve Bank’s credibility, but what is interesting to investors is the long-term growth narrative.
We need to define our terms very carefully here — action from a foreign investor’s perspective means: were there concrete deliverables, actionable timelines produced and meaningful steps to boost future growth in the past five months?
Indeed, net, were more steps taken forward than back in terms of specifics of legislation and regulation?
This has not been the case — no actionable, highly specific, time-tabled and road-mapped policy outcomes came from the recent interactions between the president and business — with the welcome exception of the small and medium-sized enterprises fund — although the group had several months to produce proposals, timelines and road maps. We should have had a list of specific regulations being unlocked to reduce uncertainty.
I was genuinely disappointed at this outcome. I had raised my expectations.
I thought after Pravin Gordhan had laboured the point at the end-of-fiscal-year news briefing at the South African Revenue Service that, from his roadshow, there was a strong feedback that investors wanted to see specifics and they would be produced at this meeting. This would have allowed a slice of sentiment to be unlocked to stabilise growth (albeit at low levels).
The question surely is why these specifics could not be provided.
The simple answer is that there is a lack of politics and leadership for it to happen even under the economic pressures of large-scale job losses and a contraction in the economy in the first quarter.
There seems to be a degree of concern inside the body politic over being held to timelines — that they create tension and are then a source of criticism when they are not met. This seems to miss the point — to get stuff done, the application of a liberal dose of leadership (and political capital) is required precisely because tension and criticism need to be overcome.
What is left then is hope, some notion of esprit de corps, a collectivism that is summoned. Business Day’s recent editorial (The big ‘Team SA’ delusion, May 11) perfectly described this as a "vacillating mirage".
The problem here is not SA’s strong sense of self-worth or national pride.
The fact is that these alone will not solve SA’s problems or convince investors that the appropriate steps are being taken. At best, some short-lived optimism and sentiment can be unlocked, leading to slightly faster, low-potential growth, but it does not do the heavy lifting required to boost long-run potential growth.
Such a strategy is fine as a stopgap between crisis and implementation, to provide a bottom under growth and job creation, but the question is what that implementation will be and if it will come at all.
I think SA is facing a problem in this regard. Investors hit the highwater mark of buy-in on this Team-SA strategy after Gordhan’s roadshow, but such buy-in has ebbed as investors, independent of the ratings narrative and events, have wondered what is going on in terms of real, difficult reforms. Here we need to focus on some of the specifics that have been enacted. Most stark has been the passing of the Expropriation Bill, just one day before the budget, adding to, rather than subtracting from uncertainty for investors.
Then there are the Mineral and Petroleum Resources Development Act amendments, which were promised to be passed (and subsequently promised to be split into three, covering mining, oil and gas), but have basically been destroyed by the new mining charter just published by the Department of Mineral Resources.
Then there are conflicting messages on public-private partnerships from different parts of government in an environment in which parastatals seem to be so constrained in funding terms that they are not really thinking of expanding their investment options, but hunkering down with existing investment pipelines.
The point is while the government has sent a message that it aims to drive forward, on balance, action has been mixed.
Ultimately, investors who bought the dream to begin with may rapidly let go as data and actions disappoint.
My biggest fear is actually "okay", which is unfortunately my forecast.
I am turning out to be quite a bull for this year at 0.9% (with risks to the downside admittedly) and 1.5% for next year.
I think there is a risk of the narrative getting lost in the triumphalism of such "okay" growth and, possibly, S&P and Fitch following Moody’s example and not downgrading SA’s rating next month (even if they do end up doing so in December).
The risk is that people look at 0.9%, a very weak first quarter and then a small rebound in the second and so no recession, and think nothing needs to be done. The political capital required to make difficult policy decisions, or at the very least, stabilise things, risks being diluted with "okay" growth numbers.
This would miss the point that even at 0.9%, there will be virtually no jobs created this year overall, and declining per capita incomes. It would still feel like a recession. We have to keep that focus on jobs and growth levels to be able to deliver SA’s developmental needs.
The deeper issue here would be to mistake a deep resilience in the private sector in output terms (although shedding jobs) for dynamism in the economy, or higher long-run potential growth.
I believe (and this is why I am, marginally, more optimistic on growth than many) that the private sector is able to take sharp political shocks and absorb a large part of them, given strong corporate deposit levels, decent governance and a lack of (specifically foreign exchange) leverage.
However, while this could help avoid a recession and provide a floor under growth rates, it cannot drive growth in the long run or create new jobs in new sectors of the economy. In turn, you are not getting the multiplier effects into consumption, taxes and beyond. As such, potential growth in the very long run is (optimistically) 2.5% and cannot move higher, long-term projections of unemployment remain sticky at the current level. This is where the focus should be — on the long run, taking the difficult decisions to get us there. Just hoping for a rebound next year is not enough.
Highly specific, credible, published, time-tabled, road-mapped and costed actionable plans are required to do this in difficult political areas such as mining, land, education and skills, small and medium-sized enterprises and labour laws. If these are produced, the "Team-SA" esprit de corps could tide the economy over until structural reforms bear fruit. Foreign investors will buy into this and invest.
• Attard Montalto is senior emerging markets economist at Nomura International in London
No comments:
Post a Comment