GDP: The search for clarity
To rekindle growth, SA must resolve the big outstanding issues of mining and land reform since investors’ initial surge in optimism has quickly given way to uncertainty
SA may think it is open for business, as President Cyril Ramaphosa claims, but the disappointing first-quarter growth and fixed investment numbers suggest the country is failing to match his good intentions with complementary state policies — and then actually execute them.
All three aspects — intent, policy and execution — will have to be aligned before investors will commit long-term capital to SA, says Old Mutual Investment Group MD Khaya Gobodo.
From his engagement with investors, it is clear that three obstacles are preventing them from taking the leap into SA: concerns about the sustainability of Eskom and other state-owned enterprises (SOEs), the lack of clarity over land expropriation, and government’s failure to finalise the mining charter.
To this list many economists would add one more — a lingering scepticism over the extent to which government can turn the economy around. SA’s policy framework remains essentially the same as it was under Jacob Zuma and the country is held back by deep structural shortcomings, such as its dysfunctional education system, which will take many years to address.
Earlier this year, after months of talks, Gobodo was close to finalising a deal with several European institutional investors to invest a couple of hundred million US dollars into one of Old Mutual’s agriculture funds when the land reform issue blew up.
"We were getting really close but they decided to press pause because of the land expropriation debate," he says.
"They said: ‘Talk to us again when you’ve resolved this issue.’"
Investors need absolute clarity on the rules of engagement and the direction in which they’re evolving, he adds.
"People don’t really know what the ANC’s position is on the land debate. It’s an important and badly needed debate but it needs to be concluded because until people understand exactly what it means, it’s very difficult to deploy capital."
Zeder Investments CEO Norman Celliers agrees. With a portfolio of agribusiness investments valued at about R14bn, the listed investment holding company is heavily exposed to the land expropriation issue.
He says policy uncertainty is causing a significant postponement of investment into the agribusiness sector because, though the private sector is positive about the future, company boards need absolute policy clarity and consistency when making 10-to 20-year investments. "We need land certainty, water certainty, BEE certainty, labour market certainty. Instead, there is a whole world of grey and fluidity when it comes to government policy."
If government could just make its policy choices and stick with them, rather than chopping and changing every few years, and combine this with an inviting and encouraging attitude to the private sector, the private-investment taps would open, he says.
All investors, not only those investing in agriculture and real estate directly, are concerned about property rights, adds Wesgro CEO Tim Harris.
"Many difficult questions we used to get from potential investors about policy decisions by the Zuma administration have now been replaced by questions about land reform policies."
He says investors would see the successful management of land reform, without negative political and economic spill-overs, as a bellwether of SA’s long-term potential.
Nedbank CIB principal for corporate finance, Tapiwa Shamu, says that immediately after Ramaphosa’s election, international buyers quickly began lining up to initiate merger and acquisition (M&A) deals in SA, including in highly regulated sectors like telecoms, energy and agriculture, and even the beleaguered mining sector.
But the initial surge in optimism has quickly given way to uncertainty and most of the hoped-for M&A deals remain stuck at a conceptual stage.
"However, while there may not be any significant increase in deal activity, the silver lining is most certainly the fact that few, if any, of the prospective investors have run for the hills," says Shamu.
He feels that the ball is firmly in government’s court. "There can be little doubt that if our new president and his cabinet act quickly to demonstrate a real commitment towards creating policy and regulatory certainty, global M&A investment inflows will follow."
But even without an immediate improvement in the policy environment, private fixed investment has entered a mild upswing and is likely to pick up gradually in the coming quarters.
Eighteen months ago, real private sector fixed investment was contracting at an annual rate of nearly 9%. It bottomed out in the third quarter of 2016 and has been mostly climbing on an annual basis ever since, though growth of just 0.5% y/y in the first quarter is certainly nothing to crow about.
Rand Merchant Bank chief economist Ettienne le Roux says this modest upward trend is likely to persist, judging from the improvement in business confidence, the notable rise in the stated investment intentions of firms captured in recent business surveys and the fact that plant and equipment is ageing and many companies will be forced to retool in order to remain competitive.
This is already evident in the fact that after many months of significant declines, real capital outlays on machinery and transport equipment have begun to increase.
Firms also have the capital to invest, having been on a credit diet and in cost-cutting mode for the past few years.
Rounds 4 and 5 of the independent renewable energy producer process and the expansion of special economic zones could give fixed investment an additional kick over the next few quarters.
"All in, I’m not suggesting private sector fixed investment will shoot the lights out. But moderate positive growth is quite possible in the years to come," says Le Roux.
Should the uncertainty caused by the "dawdling and debilitating debates" over mining and land reform be removed from the picture, the investment kicker from the private sector would be that much stronger and economic growth that much higher.
What it means
SA needs policy clarity and consistency to attract greater investment
Gross fixed investment would get another shot in the arm if the state were able to eliminate poor management and corruption, especially at SOEs.
Martyn Davies, Deloitte’s MD of emerging markets and Africa, believes that if SA could fix the SOE sector this alone could propel the economy to a 3% growth rate.
"We have to focus on the functionality of departments and [have] a state apparatus that can implement effectively, otherwise we have a problem," he says.
Even if Ramaphosa’s good intentions were perfectly aligned with ANC policy, there is still a big question mark over whether the state can actually execute his, or any, policy vision.
Take, for example, the fact that the CEO of RwandAir, Yvonne Manzi Makolo, was unable to get a visa to attend the launch last month of the airline’s new flight route from Kigali to Cape Town via Harare.
Harris says he spends 80% of his time wrangling with home affairs trying to expedite investors’ access to the Western Cape
"I think our immigration policy doesn’t make it easy enough to bring in the skills our companies need to grow. If there is an ideological issue it’s a failure to recognise that skilled immigrants are significant net job creators. That said, when we do escalate bureaucratic and red-tape issues to senior officials, and the deputy minister and minister at home affairs, we are able to get them resolved more often than not."
He notes that SA is responsible for only 2% of the services consumed in the rest of Africa, suggesting vast potential for the country to tap into the continent’s $400bn predicted consumption spend over the coming decade.
In fact, one of the biggest investors in the Western Cape last year was a Czechoslovakian company which spent more than R1bn on a facility in Atlantis to sell nappies into the rest of Africa.
By 2050, says Harris, the African population is set to explode to 2.4bn from around 1.1bn now and "someone needs to feed them and provide them with consumer goods".
Already, the Western Cape exports more to Africa, at around R45bn/year, than Europe does. Of the province’s top 10 exports, seven are agricultural products.
Now, if we could just get some clarity on the sanctity of property and land rights ...