Picture: 123RF/SONDEM
Picture: 123RF/SONDEM

The economic recovery since the height of the Covid-19 crisis has been striking. Barring a severe fourth wave of infections and lockdown restrictions, SA’s real GDP could breach its pre-pandemic level by the third quarter of 2022, a milestone most analysts initially thought would take until 2023/2024 to achieve.

But the upturn is unbalanced. It has come essentially from just two sources: consumer spending and exports. And prospects for both look increasingly muddy.

Domestic consumption has benefited from strong government income support, large public sector wage increases, a recovery in private sector incomes, lower inflation and sharp interest rate cuts — a combination that has offset the effects of significantly higher unemployment.

Yet these props will probably fade. Higher food and petrol prices have already turned inflation into a mild headwind, and interest rates are now rising. Equally, the strong increase in global trade and commodity prices, which powered exports over the past 18 months, looks unsustainable as China’s growth slows and stays comparatively low in the absence of big-bang policy stimulus.

As growth in consumer spending and exports slackens, and the government curbs recurrent spending as planned, it leaves only fixed investment to pick up the slack. If it doesn’t, the economic recovery will waver.

So, where will the investment thrust come from? The precarious financial position of the government and most state-owned enterprises (SOEs) means it won’t come from them, at least not soon.

The Treasury predicts that fixed investment will climb from 7.5% of government spending to 9% over the next three years. This is a timely trend reversal. But the additional spend is small fry at only R45bn, or R15bn a year. And the picture is hardly better for SOEs.

Over the period to 2024 Transnet, Eskom, Airports Company SA (Acsa) and the SA National Roads Agency (Sanral) together have the capacity to raise investment by only R80bn compared with the total spend since 2019. The small increase in planned capex by the public sector makes it clear the investment impetus can only come from the private sector.

The good news is that big businesses now have balance sheets that enable them to respond. Most have been on a credit diet over the past year-and-a-half, and many have used the Covid-19 crisis to refocus on streamlining operations. With debt levels mostly under control, costs managed down and revenues improving as the economy rebounds, large firms have the financial wherewithal to ramp up investment. And there’s evidence it is happening.

In the second quarter of 2021 the private sector invested R145bn, or R35bn more than the low of a year earlier. Capex is already around 92% of what it was in the fourth quarter of 2019, before Covid-19 struck. This isn’t a weak result considering the extreme uncertainty that firms had to navigate over this period.

By contrast, in the aftermath of the 2008-2009 global financial crisis, which included a mild recession by comparison, it took private sector fixed investment three years — twice as long — to reach 92% of the level at which it peaked in the quarter before the credit crunch hit.

We are likely to see a further upgrade of productivity-enhancing machinery, equipment and IT, coupled with increased investment in growth areas like low-cost housing, student accommodation, warehousing, industrial parks and rolling stock. But important as this is, it will only go so far in providing the investment propeller the economy needs. Substantial new private investment in infrastructure is also vital.

The country’s infrastructure stock is in dire need of refurbishment and expansion, and failing to do so will not only sacrifice GDP growth but also undermine SA’s long-term growth potential. However, there are signs things are changing. Apart from modest plans by the government and some SOEs to increase investment there is, at last, an acknowledgment that the problem is far bigger than the public sector can fix on its own. In particular, since the launch of Operation Vulindlela the government has shown improved willingness to involve the corporate sector.

Take electricity. An ageing (and creaking) power generation fleet, coupled with the urgent need to diversify power supply to reduce load-shedding, have expedited the delivery of emergency power, the restarting of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), and changing the rules to allow companies to self-generate up to 100MW of electricity.

About 10,000MW of potential new supply is now on the cards (excluding the pending release of bid window 6 of the REIPPPP), thanks to the government’s decision to transform the energy sector. This alone will translate into direct investment of about R160bn, not to mention the multiplier effects it will have on sectors such as manufacturing, construction and engineering.

Similarly, the state is now calling on the skills and capital of the private sector to help reverse long delays in the expansion and improvement of port infrastructure and operations. Large amounts of new investment will also follow when the government releases broadband spectrum next year.

Even if only half of the potential new private investment in renewable energy, port upgrades and telecommunications materialises, it will lift SA’s investment to GDP ratio by two to three percentage points, to about 17% — still low by emerging-market standards but a trend reversal worth noting.

Over and above the boost to these key network infrastructure sectors is another encouraging signal that the government is serious about bringing in private players to help with infrastructure backlogs. The Treasury recently completed a review of the framework for public-private partnerships (PPPs), recommending the regulations be simplified, delays in approval and implementation be eliminated, and standardised project preparation be implemented from early 2022.

Though PPPs are an important vehicle for private investment in public infrastructure, SA has only seen about R90bn worth of such partnerships since 1998, most in the earlier years. The Treasury review should help unlock private investment in a range of projects at local, provincial and national government level.

Beside ongoing efforts to fix the public sector’s finances, problems like weak capacity and insufficient checks and balances, which continue to constrain capital outlays, must also be resolved. Meanwhile, the government would do well to rapidly open up the market for the private sector to invest/co-invest in the infrastructure needed for faster and more sustainable GDP growth.

Corporate SA has the means and ability to respond and stands ready to do so. It’s within the country’s reach to turn the economic recovery into a full-blown upswing. We cannot let this opportunity go to waste.

• Le Roux is chief economist at Rand Merchant Bank.

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