SA needs clear policy reforms first, then investment will follow - Old Mutual

Policy certainty remains critical in South Africa to attract much-needed investment, according to experts at Old Mutual Investment Group.

This includes on key issues such as mining, land reform and corruption.

Old Mutual's investment experts say although President Cyril Ramaphosa's election as president - and his subsequent moves to root out public sector corruption - buoyed confidence in SA's economic prospects, negative growth and perceived slow progress have substantially reversed this.

Old Mutual Investment Group managing director Khaya Gobodo says South Africa used to take a far greater share of the permanent foreign capital allocated to the African continent.

However, poor growth and policy and economic uncertainty took its toll.

"The key to investment revival is business confidence, and SA businesses remain pessimistic about the country’s economy," he says. "Policy clarity and execution are a key ingredient to driving improved business confidence."

In his view, real structural reform, and its subsequent execution, will provide the evidence needed to inspire business confidence.

"SA will have to improve the way it implements its policies to facilitate better investment conditions.

"This includes policy certainty relating to the Mining Charter and land reform; continued strong focus on anti-corruption measures; and improved public sector governance, specifically relating to state-owned entities," says Gobodo.

"We are already seeing what seems to be increased commitment from President Cyril Ramaphosa and his Cabinet to the implementation of structural reform and we would expect the pace to accelerate after the 2019 elections."

Global growth support

SA's growth is still being supported by the global growth cycle and, while undoubtedly slow, might not be as dire as assumed.

Yet the need for policy clarity remains in order to attract investment, says Johann Els, head of economic research at Old Mutual Investment Group.

Although economic reforms could accelerate after the 2019 elections, SA's slow growth highlights, in his view, the serious need for substantial, meaningful structural reform.

He warns that the risk to fiscal sustainability and credit ratings have increased again.

"The risks facing the global environment are likely to lead to further growth moderation, but they’re unlikely to derail growth altogether," he explains. "Ultimately, we will see growth slowing further into 2019, but a recession is unlikely." 

He believes local growth is likely to end this year very close to the 1.3% achieved during 2017, which is markedly lower than what was expected at the start of the year.

"Business confidence is still lagging, but consumer fundamentals are not as bad as people may think, despite the short-term pain caused by the VAT increase, petrol hike and more," says Els.

Progress

Ramaphosa’s $100bn target in new investments has been showing progress.

"We’ve seen recent investment commitments from Saudi Arabia, the United Arab Emirates, China and the UK, as well as private sector investment from Mercedes Benz," Els notes.

"If this trajectory continues, we could be well on our way to meeting this ambitious target and the success of the investment drive could lift gross domestic product (GDP), although it will need a sustained confidence boost."

At the same time, there remain significant risks, cautions Gobodo.

Ramaphosa's investment drive could take gross fixed-capital formation to 25% of GDP, but only if the requisite investment conditions are met, which includes the abovementioned policy clarity and certainty.

"This is even more relevant as the state does not have the balance sheet capacity.

"SA’s budget deficit, combined with already high levels of debt, make it difficult for the state to substantially increase its contribution to fixed-capital formation," he explains.

"The private sector is, therefore, a key driver of gross fixed-capital formation, but is also constrained by the low savings rate in the country. This means heavy reliance on foreign capital and exposes our vulnerability to capital flow reversal."

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