JOHANN ELS: Radical economic transformation is coming — the good sort

Weak confidence in SA’s future continues to be fuelled by a barrage of bad news.

From political infighting in the governing party that risks further social unrest, to a floundering education system, entrenched corruption and a lack of law and order, the country has many weak points. However, analysts who focus only on SA’s bad news, risk missing the improvements the country has seen that could boost growth expectations beyond conservative forecasts.

SA already has a number of positives going for it, such as strong institutions, a strong constitution, independent judiciary, a politically stable democracy with entrenched rights and a free media, a strong financial sector and generally healthy corporate sector, and easing fiscal crisis risks and capable new minister of finance.

But policy reform, such as what we saw last month about the energy sector, could prove to be the turning point to lift confidence in the country. In fact, the energy reforms announced by President Cyril Ramaphosa are the most consequential structural reform seen to date, apart from the shift to a democratic society — particularly when it comes to the opening up of energy policy regarding the private sector.

SA’s growth path is changing from a downward to an upward trend, and the country’s economic future is vastly improved from a few years ago. I expect 2.5%+ annual average GDP growth over the medium term. This is a noteworthy shift from the pitiful 1% per annum growth over the five years to 2019.

Given the increased emphasis from the governing party on the private sector’s role in the economy — in energy and other logistical areas such as railways and ports — I am even more confident in this improving trend.

In fact, this move towards more private sector participation in the economy is radical. Radical economic transformation is therefore back — but the good sort, rather than the feared populist shift of yesteryear. Relative to last year’s populist-driven unrest and the ANC’s weak performance in the local government elections, the emphasis on the private sector’s role is significant.

This uplift to 2.5%+ growth is certainly better — more than double the previous 1% — and will start affecting confidence, investments and further reduce fiscal risk. But it is clearly not enough yet.

To lift growth further towards 4%-5% on a sustained basis, there needs to be extensive privatisation. This is not at all about income for the state (failed SOEs are unlikely to attract buyers willing to fork out large sums), but rather getting private-sector expertise to run these companies more efficiently and reduce the financial strain on government.

Outright privatisation, as such, might never happen, but the increased role of the private sector in traditional government and SOE functions — which we’re starting to move towards with this emergency energy plan — could be seen as “privatisation by stealth”. However, we still need to see more crucial reforms such as labour market deregulation, education system reform and a stronger social compact between government, labour and business.

Strong position

Regarding the question of whether SA will be dragged down with the global economic slowdown, the country is in a far better position than at previous times of similar global circumstances.

Globally, growth indicators are slowing, with increasing risk of a global recession, and global inflation is likely to roll over soon, with US personal consumption expenditure inflation likely to ease before CPI inflation. The US Fed’s message is likely to change, and we also expect an uplift in Chinese growth momentum. But the risks are not insignificant in the global environment, particularly the recession risk, which is rising sharply.

Regarding the impact of this risk on SA, I am optimistic. SA’s inflation problem is less severe than that of global inflation, while the current account is in a strong surplus position, thanks to supportive commodity prices, and the global outlook is also not as deeply negative, given the policy support and likely growth momentum lift expected in China.

The SA growth outlook for this year and the medium term should also be rand supportive, and, while SA rates will still need to normalise more, there is no need for the Reserve Bank to be as aggressive as the Fed. Ultimately, we are in a position to better withstand the pressure than in the past.

I expect the SA economy to recover in the second half of the year. The manufacturing purchasing managers index (PMI) was hard hit by load-shedding. The whole economy's PMI is still expanding, but the leading indicator is easing. Inflation is now likely to stay above 7% until September or October, moving down to about 6% by December and 4.5% by the end of 2023.

Services inflation is still low, while consumer goods inflation rates have been under upward pressure recently but should peak soon. Consumers are likely to experience fewer price pressures in future as businesses will not be able to pass on the price increases that they did previously, when consumers were more willing to accept increases.

On the whole, confidence in SA is set to improve, and SA economic growth needs sustained stronger confidence if it is to get on a better footing. Radical economic transformation is certainly occurring in the country, but not the kind that has concerned us to date. Rather, policy is shifting to the right of centre, with increasing emphasis on the private sector’s involvement in the economy, a hugely promising prospect for the future of SA.

• Els is chief economist at Old Mutual Investment Group.