Back to basics: Improving the education system has been identified as one of the factors vital to bettering the economy. Poor education results in poor skills and low productivity, unlike the case with an educated workforce. Picture: ANTONIO MUCHAVE
Back to basics: Improving the education system has been identified as one of the factors vital to bettering the economy. Poor education results in poor skills and low productivity, unlike the case with an educated workforce. Picture: ANTONIO MUCHAVE

We should put behind us the era of diminishing trust in public institutions and weakened confidence in leaders — that, was a key statement to come out of President Cyril Ramaphosa’s 2018 state of the nation address.

Statements such as this show that he is clearly keenly aware of the issues facing SA, and appears to be sensitive to the challenges ahead.

During his first address as state president he spoke of a necessary collaboration between business and labour, the need to ensure economic growth and a requirement to encourage new investment.

In addition, he indicated that some tough love was needed to close the fiscal gap, stabilise debt and restore state-owned enterprises to health.

These statements were like a breath of fresh air. A new leader with a credible vision was always likely to be seen as a positive by investors and, so far, this has been the case. At the end of the day it all comes down to good governance. Investing in a country is like investing in a company. Over and above the business case there has to be a competent and honest management team that can be trusted to deliver on strategy.

Unfortunately, over the past few years, when the rest of the world has been enjoying economic vitality, SA has been dogged by a lack of confidence from the consumer and business. The consequence has been a declining private sector investment experience.

The consideration now is just how bad this decline has been. What’s it going to take to turn it around? And just how good can it potentially get?

SA’s potential GDP growth rate has slipped from about 3.5% (1995 to 2008) to less than 1.5% from 2010 onwards, by some estimates. This is barely ahead of the population growth rate. Economic growth is a consequence of people plus productivity. SA has the people (in fact the country is in a demographic "sweet spot") so it is now all about unleashing productivity. But how do you do that?

The ingredients needed to unlock this potential include:

   Increased investment typically leads to increased productivity. A constraint is that low levels of disposable income leads to low domestic savings and consequently low investment. Attracting foreign investment is a way to break out of this conundrum. SA is capital-hungry and a demonstrable move to good governance will go a long way in achieving this.

   Efficient financial markets play a crucial role in allocating capital to investment markets. Fortunately, this is one of SA’s strong points.

  Political stability, rule of law and the protection of property rights. A lack of any of these increases risk and discourages investment. New and improved governance will go a long way to providing a stable base for economic growth. The land expropriation without compensation debate is a potential threat, but hopefully it will be dealt with in a responsible manner.

   Education and healthcare. Poor quality education constrains skills and productivity. There is a clear recognition of this problem in SA and free tertiary education coupled with a potential partnership with the private sector should see an improvement in producing skilled workers. Poor health is another impediment to growth and a move to national health insurance (albeit complex from a funding perspective) would be positive in the long term.

So, SA could possibly get to a potential growth rate of 3.7% or more. If this were to happen, what would it mean for investment markets?

   Tax and regulatory systems play a significant role in supporting economic growth. Lowering barriers to entry from a regulatory perspective would be a big plus for SA’s economic growth. More efficient government and higher economic growth could lead to lower potential tax rates over time, which would reinforce a virtuous economic cycle.

   Free trade and capital flows. The more open the economy, the more global savings to finance domestic investment.

If SA gets it right, the upside potential is enormous. Let’s try and quantify this.

Starting with our 1.5% potential growth rate as our base, the following could potentially be added: 1.5% current potential growth, plus 0.5% from mining and manufacturing on the back of improved confidence, plus 0.6% from telecoms reforms, plus 0.6% from competition policy and research, plus 0.3% from transport reform, plus 0.2% from enhanced agriculture and tourism, and in addition privatisation, education and labour reform could add even more potential growth.

So, SA could possibly get to a potential growth rate of 3.7% or more. If this were to happen, what would it mean for investment markets?

Potential GDP growth is a critical input with respect to evaluating the investment appeal of various asset classes and the securities that make up those asset categories. A high potential growth rate means that strong economic growth can be achieved without triggering a strong inflation effect.

This means the central bank does not have to raise interest rates to quell this pressure. Low inflation and low policy rates are clearly positive from a bond market perspective.

From an equity perspective, the effect is marked. High levels of economic growth underpin revenue and earnings growth potential and low discount rates (low interest rates) mean that the present values of those buoyant future earnings streams are boosted.

Implementation is key, but if SA can get it right a new dawn will definitely have arrived.

 •  Appleton is SA head of multi-asset and strategy at Ashburton Investments.