It is vital that government sees private business, with its good management skills, as a friend and not an enemy, in order to address the problems in SOEs such as Eskom and the SABC.
This was some of the advice from Ian Cruickshanks, chief economist at the Institute of Race Relations and a regular commentator on television and radio business channels, in an interview with the Dolphin Bay Brief.
Ian was commenting on the latest economic and political developments in South Africa, and the resulting state of public morale. President Cyril Ramaphosa needs to persuade many factions, including the unions, that the private sector is not the enemy, that a good management style needs to be introduced urgently, and that he is already introducing this management style.
To achieve this, it will be vital that he garners the union vote in the national elections in May.
South Africans are “a very resilient bunch who work their way around problems,” but the challenges currently facing people and business in the country are vast and varied. They are dampening public morale to the extent that many people who are able to emigrate, are choosing to do so, Ian said. Read “Where Will I Go?”
The challenges range from rising unemployment, and the prospect of slow economic growth for years to come, to our threatened electricity and water supply and the rising price of fuel. Challenges are affecting everything, from foreign investment to the aspirations of the poor, whose lot will deteriorate in coming years before it improves.
South Africans are “a very resilient bunch who work their way around problems,” but the challenges in the country are vast and varied.
Ian said ratings agency Moody’s recent decision to not give an actual investment rating answer did not mean they were giving Ramaphosa a break, because they had to be seen to be neutral. He also said proposed changes to the government structure are promising and could have a positive impact on the economy, but this will depend on the outcome of the election. Moody’s might have taken this into consideration.
He said we will have “rolling blackouts for the foreseeable future”, which is destroying confidence across the board. “These blackouts are hampering development and therefore job creation.”
Investors need to be sure that enterprises are cost-effective, and a reliable energy supply is a major factor in achieving this. The electricity challenges are worsened by the recent 15% electricity rate increase, granted to help out the hugely problematic energy supplier. Currently, investors are increasingly seeking opportunities elsewhere, rather than in South Africa.
The Eskom chaos and other factors are becoming painfully evident in business. The construction industry is now in deep trouble with Group 5 and Basil Read, both major construction companies, having just filed for business rescue. “Government promises of massive infrastructure and economic development – a total of about R800 billion – have proved to be unsubstantiated. It just hasn’t happened,” Ian said.
Eskom would have been better off trying to keep the old power stations going and not trying to improve things by constructing Medupi and Kusile at huge cost, as both the planning and execution of these projects was poorly done.
The price of diesel and petrol was fluctuating wildly due to international factors. However, this caused difficulties for citizens and smaller businesses. “When diesel goes up, everything goes up, but when petrol and diesel come down, other commodities do not. It is one-way inflation,” Ian explained.
The country was heading for major difficulties concerning the supply and purification of water, as is being seen in smaller towns such as Makhanda, where Day Zero has already come. Growing problems with the availability and purity of piped water would cause its price to rise, and yet again, the poor would battle to pay the price of bottled water.
South Africa’s debt-to-GDP ratio was set to go up to at least 60% in the next few years, which means the country is heading for a “debt trap”.
Ian believes unemployment will get worse before it gets better, affecting the poor worst of all. A first step is revamping the education system, “so that development can work its way up from there”.
He said it was proving increasingly difficult to find people to start new businesses and apply their capital. It was unlikely there would be an improvement in business creation in the medium term of three to five years, and growth could remain between 0% and 1% for the next two to three years.
Some commentators have pointed out that without the Eskom bailout, South Africa’s debt-to-GDP ratio would be below 60%. However, Ian said this was set to go up to at least 60% in the next few years, which means the country is heading for a “debt trap”. A possible downgrading by the ratings agencies at some stage would also mean higher costs of borrowing in the future.
South Africa is the second largest economy on the continent, but a major problem is that other emerging markets in the region are growing by 6% to 8%, leaving the country behind. There had been no sustained growth in South Africa since 2008, before the financial crisis, when growth was around 5%. A lack of sustained growth means that employment figures cannot increase.
It is vital that government sees private business, with its good management skills, as a friend and not an enemy.
Ian expressed doubts about the success of the plans to nationalise the Reserve Bank, as the governor and deputy governors of the institution knew exactly what they were doing, and the change could make it very difficult to stir up foreign investment. “South African institutions need as much independence as possible.”
He said the outflow of foreign equity this year was about R32 billion until the end of March, with a net purchase of government bonds at R5 billion because of unusually good returns of 8%. This discrepancy is a problem.
Corruption had done immense harm to the Public Investment Corporation (PIC) and it is even possible if all pensioners involved called in their pensions at once, they would not be paid out in full.
The analyst said the top echelons of government, and some businesses, had set a terrible example over the last decade, meaning that people in the lower strata of organisations felt they could also be corrupt. There would have to be changes in this regard before new capital inflows could occur in a serious way.
He recently attended a meeting where a massive consumer organisation had publicly announced: “There is no end in sight to the constraints facing the consumer spending environment.” Consumer spending is responsible for over 60% of all economic activity in the economy.
“A shocking situation has developed, and politicians need to do whatever they can to try and improve it,” Ian concluded.