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4 minute read
12 Apr 2019
7:43 am

Political turmoil has led to a lack of confidence and low growth, says economist


But here are three easy wins that can lift economic growth.

Cape Town-190207-.President Cyril Ramaphosa addresses the nation at the national assembly.This is Ramaphosa's second state of the nation address,after taking the reigns from President Jacob Zuma who resigned in december 2018. photograph; Phando Jikelo/African News Agency(ANA)

South Africa cannot be successful until business confidence returns to an index level of at least 50, a level considered neutral.

Speaking at the Investment Forum 2019, Stanlib chief economist Kevin Lings said if South Africa’s business confidence had been at a level of around 50 in 2018, the economy would have grown at 2% instead of 0.8%.

Business has suffered from a lack of confidence in recent years (see below) and political turmoil and policy uncertainty have weighed on growth.

Sources: BER, South African Reserve Bank

A recent SA Reserve Bank study found that every 1% increase in business confidence leads to a 0.5% increase in fixed investment.

“So what does it say to me?

“If you want to grow this economy, just make business happy – they will do the rest.”

Although South Africa grew at an average of around 4% prior to the global financial crisis, growth has gradually slowed to an average of roughly 1% over the past 10 years.

Lings says given South Africa’s population growth, economic growth of 1% is unacceptable and – if left unchecked – will lead to social chaos.

“We need to create 600 000 jobs a year to deal with the emerging population.

“You can’t grow at 1% and create 600 000 jobs. That will not happen.”

But with government’s debt-to-GDP ratio heading towards 60%, it would be naïve to think that government can spend its way out of its economic predicament.

Lings argues that any solution to the problem will need to meet three criteria. It has to be politically acceptable, something government has already spoken about, and of low energy intensity.

While there are various potential solutions that would meet these criteria, Lings highlighted three: make it easier to do business, build houses and lure more tourists to the country.

“I would argue that you do any one of those things better – any one – and you would start to change sentiment in this country, and that is what you are ultimately after.”

1. Make it easier to do business

South Africa currently ranks 82nd on the World Bank’s Ease of Doing Business Index.

“We used to rank around about 40 or so, but in the last four years the ease of doing business has deteriorated. We make it incredibly difficult to do business.”

In his State of the Nation Address, President Cyril Ramaphosa announced that he wants the country to get back into the top 50 within the next three years.

Lings says this doesn’t require a significant amount of effort, is achievable and will lift business confidence.

It is incredibly difficult to start a business. South Africa is ranked 134th out of 190 countries on this metric, falling from 61st just four years ago.

Rwanda is ranked 29th in the world, following its introduction of new technology that allows for online registration.

2. Housing

Although government doesn’t always deliver on its promises, its ability to develop housing over a long period of time has been pretty good. Yet, over the last 10 years mortgage finance growth in the private sector has been muted.

“If you are able to develop a housing market in any country it does incredible things to lift confidence and growth, and there are a huge number of people in South Africa that earn too much money to qualify for an RDP house but too little money for banks to be interested.”

Lings says banks are currently more willing to grant personal loans for people to go shopping than give a young family a mortgage to buy their first home.

“That stifles the economy. Developing housing does way more for a country than going shopping.”

The level of fixed investment in housing in South Africa is extremely low when compared with developed countries that don’t need more housing.

“The housing market is an obvious win for South Africa.”

3. Tourism

By almost any measure, global tourism is currently at an all-time high. There are more aeroplanes and a greater amount airport space than ever before. More than 4 billion people fly once a year.

Although the amount of money South Africa receives from foreign tourism has reached a record high, in dollar terms the picture looks much less rosy.

South Africa is currently ranked 107th in the world in terms of the size of its tourism market relative to GDP.

Lings says it is hard to believe that this is the country’s true ranking, given its natural attractions. It should be in the top 50.

At the moment, only 4.5% of people employed are either employed directly in tourism or associated with tourism. The global average is 10%.

“If South Africa could start to attract the average level of tourism given the size of our economy, that would do wonders for employment.”

Lings says if South Africa can get any one of these three things right, business confidence will improve.

“Ultimately this is what is stopping South Africa [from] achieving more economic success. South Africa cannot be successful until this number [business confidence] is at the 50 index level.”

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