Hard task, long road to reconstructing SA’s economy
SA’s reconstruction is expected to be neither speedy nor painless, as the harm that was done is extensive and corrupt forces are trying to regain their influence
There is an emerging consensus that SA’s short-term performance is likely to be disappointing, and change will probably be slow — both because president Cyril Ramaphosa is hamstrung by ANC infighting and because it will take time to repair the damage done by state capture and corruption.
This was the message from several speakers at the annual Nedgroup Investments Treasurers’ Conference in Sandton last week.
It chimed with the sombre tone of the annual Article IV assessment of the SA economy by the International Monetary Fund (IMF) and Fitch Ratings’ midyear review, both of which were released the same week. Fitch retained SA’s long-term local and international credit ratings on the top notch of subinvestment (junk) grade, and affirmed its "stable" outlook.
Last month S&P also moved SA’s rating sideways. Only Moody’s has changed the outlook on SA’s ratings to "positive" this year.
In essence S&P, Fitch and the IMF agree that though things are improving in SA, huge challenges remain. Key concerns include the financial position of state-owned enterprises (SOEs) and the country’s fiscal situation, with debt set to continue climbing for the foreseeable future.
Though they all expect economic growth to pick up and average about 2% over the medium term, the consensus is that this mild, mostly cyclical recovery will be inadequate to dent sky-high unemployment and inequality.
While the IMF exhorts government to implement an ambitious reform agenda more forcefully, Fitch sees little immediate prospect that it will engage in the type of structural reform that will lead to a meaningful spike in GDP growth.
With per capita income barely set to grow over the medium term, the worry is that fiscal and social pressures will mount, and so, too, will demands for populist redress.
In short, years of backsliding have dug the country into a deep hole and it is going to take significantly more time and effort before conditions improve for the average South African.
Nedbank chief economist Dennis Dykes estimates that because of state capture, SA’s GDP is about R500m smaller than it would otherwise have been over the past five years, tax revenue is about R150bn less and roughly 600,000 fewer jobs have been created.
Moreover, SA’s manufacturing sector, which has historically surged in response to improving global indicators, has become completely unresponsive since 2011. Dykes thinks this might be because cumulative electricity price increases of more than 300% have hollowed out SA’s traditional areas of production.
"Tremendous damage" has been done to the economy, Dykes told conference delegates. And though he believes the situation can be repaired, with SA’s growth potential recovering to 3% or higher, he warned that it will take several years to get there.
Nedbank CEO Mike Brown argued that SA is "at the early stages of a complex, political turnaround". Provided the global environment remains supportive, this should lead to better policies and investment, which should drive better growth and job creation, he said.
Though this process will probably be slower than business would like, and there will be "a lot of bumps in the road", Brown is confident that SA is improving.
For business, he said, the challenge is to go from being "activists" to "nation builders" to accelerate SA’s reconstruction.
Independent political analyst Prince Mashele warned delegates not to expect too much from Ramaphosa, arguing that he is hamstrung by a "titanic struggle" within the ANC between what he billed as the forces of light and darkness.
Ramaphosa represents the "saints" in the ANC, while those allied to former president Jacob Zuma, the "sinners", are actively gearing up to fight to re-establish control over the party and the country. Mashele expects this group to repeatedly test Ramaphosa’s authority and attempt to weaken his administration.
Public enterprises minister Pravin Gordhan also warned, in a presentation on SOE reform, that SA would have to endure a period of rehabilitation.
"We will go through a transition period. We will not be able to switch off the past and switch on the future," he said, estimating that it will take about two years for government to change the business models of SOEs to turn them into more efficient and sustainable entities.
The process is being made more challenging by the fact that the forces behind state capture are fighting back.
"They’re finding every means to hang on to their gains and to get rid of the good guys so they can carry on with their destructive [ways]," Gordhan said.
Because of this, he argued, it is essential to get a good handle on what state capture has done to SOEs, to act on the forensic reports commissioned by SOE boards and to track down the money, freeze it and repatriate it.
Eskom has begun to conduct lifestyle audits of its employees, and this is being extended to other SOEs, Gordhan said.
"Hopefully in two years’ time we will have broken the back of state capture and recovered some of the money."
Gordhan pledged that the malfeasance uncovered by new SOE boards would be followed up to ensure people face consequences for their wrongdoing.
"Part of our problem is that to date there hasn’t been a prosecution for a violation of the [Public Finance Management Act]. The only guy charged was me," he said, to the delegates’ amusement.
"How many people have been sent to prison?" he asked rhetorically, "Unless there are those sorts of consequences, you develop an idea of impunity."
Similarly, the "blank-cheque phenomenon", whereby SOEs are issued with government guarantees and bailouts, needs to end, Gordhan said. He was responding to a comment from the floor to the effect that the provision of almost R500bn in government guarantees has created a culture of financial indiscipline in the SOE sector.
For instance, statistics presented at the conference revealed that Eskom’s head count climbed from 32,674 employees in 2007 to 47,658 in 2017 (see graph). The number of senior managers jumped from 80 to 400 over the same period. Partly as a result, Eskom’s average annual wage blew out from roughly R290,000 a person to R773,000 by 2017.
Only one company in SA has a higher average wage, according to Gordhan – a financial institution that he declined to name. (In the case of Nedbank the average wage is about R530,000.)
There is no sense, however, that the near collapse of the SOE sector has caused government to want to reduce the entities’ monopolistic role in the economy.
Rather, Gordhan said government’s vision is "to re-establish SOEs as important and dynamic role players in the economy". He believes SOEs have huge potential to be catalysts for growth and that if they are managed correctly, SA could be more competitive and grow much faster.