ARTHUR KAMP: Mountain meanders and macroeconomics: five points to ‘cure’ what ails SA

There is nothing like clear air, exercise and a lofty perspective to wrap your mind around the instability and uncertainty of global economies. In fact, my best advice to someone tasked with studying the vagaries of economic growth, government debt, inflation, interest rates and countless other macroeconomic constructs — and especially to those who must understand the impact these unknowns might have on businesses, consumers and investment portfolios — is to take a weekly “meander up the mountain”. You will be amazed at the insights you gain as you get the old ticker going.

My meander up the mountain anecdote served as an opener to my participation in a recent Satrix Index More Macro Insights discussion, alongside Laura Cooper, senior investment strategist for EII EMEA at BlackRock, and Nico Katzke, head of portfolio solutions at Satrix. As it turns out, an opening comment on exercise and heart health proved opportune because I was soon put on the spot by the moderator asking about the “pulse” of the country as we near the midway point of 2023. There is no short answer to this and other complex economic questions, but on reflection it is possible to offer a five-part “ailment and cure” pairing for SA.

1. Attract capital by raising the GDP growth rate. SA’s inability to attract foreign capital is one of its critical challenges. Net capital inflows peaked back in 2015, with a palpably weak level of net inflows in recent years. The “raise GDP growth” cure is difficult to administer and made more so by our poor domestic savings rate. Simply put, the country has precious little capital to build and/or maintain business-critical infrastructure in areas such as electricity and transport, to name just two. Somewhat ironically, we need foreign capital inflows to address one of the constraints to those inflows!
2. Mend infrastructure to create jobs, bolster the economy. In 1989 Kevin Costner starred in Field of Dreams. This movie became somewhat famous for a quote that is useful in our infrastructure debate today: “If you build it, they will come”. As illustrated during the run-up to our hosting of the 2010 Soccer World Cup, few things attract foreign capital as successfully as a domestic infrastructure boom, which promises to lift a country’s potential growth rate. We must accept that SA’s next economic renaissance begins with government — in partnership with the private sector — bringing our infrastructure up to scratch. (PS — I know it does not help to dwell on what could have been, but can you imagine if SA had powered through the recent commodity price boom unhindered by policy uncertainty and electricity and transport infrastructure constraints? Growth, jobs and tax revenues would have been off the charts!)
3. Heal the currency by exiting the FATF grey list. Much has been written about the global Financial Action Task Force (FATF) decision to put SA on its grey list. In theory, at least, the greylisting results in constrained capital inflows, which in turn potentially weigh on the currency. As a small, open economy SA may also experience the greylisting through inflationary pressure, raised interest rates and slower economic growth. The bottom line is we need to get off the grey list to “clear the air” for foreign investors and create an environment conducive to attracting capital inflows, which would help stabilise the rand. Much needs to be done to ensure our enforcement and prosecution capabilities meet the FATF’s stringent hurdles, but there are encouraging signs that we appear willing to work with the institution to tackle the remaining issues.
4. Address contingent liabilities to cure the balance sheet. There is significant risk in assessing government’s balance sheet in isolation from the contingent liabilities at its state-owned enterprises (SOEs). Case in point: government has transferred hundreds of billions of rand to Eskom over the past few years. Any ongoing support of parastatals raises the country’s borrowing requirements, raises the cost of debt and means we end up with a higher debt-to-GDP ratio than would otherwise be the case. Government has been talking about stabilising debt for years but keeps kicking the proverbial can down the road — taking contingent liabilities in hand would be an important win.
5. Shift from a consumption to an investment mindset. Though the National Treasury intends to lift investment spending, government continues to absorb a high share of domestic savings for consumption. The more it does so in the absence of sufficient foreign savings inflows, the less there is available for the domestic private sector to invest in and grow the economy. So, though fiscal consolidation sounds quite draconian — and can be difficult in the context of SA’s socioeconomic realities — it is non-negotiable to provide the space for the domestic private sector to invest and grow the economy. Fiscal consolidation through the constraint of government consumption opens the pathway to higher infrastructure spending, which contributes towards creating an investible environment.

Katzke closed the session by offering me a magic wand to cure what ails SA. My wish was that National Treasury focus on point five above, while the SA Reserve Bank maintains its no-nonsense approach to its inflation-targeting mandate. It turns out, however, that our five-part “ailment and cure” pairings are inextricably intertwined, each driving or hindering the other.

If we cut consumption spending, raise infrastructure investment and create space for the private sector to participate in the economy, we can raise the country’s potential growth rate, which will bring much needed foreign capital back to our shores and spill over into jobs and improved socioeconomic outcomes.

• Kamp is chief economist at Sanlam Investments.