Political turmoil was a significant deterrent to new investment in South Africa and is hampering the country’s economic growth, an analyst has argued.
“Unfortunately, that is the case in an awful lot of African countries right now – it is very discouraging,” Melissa Cook, managing director of New York-based consultancy African Sunrise Partners told Moneyweb ahead of the CFA South Africa Annual Conference.
Cook – an expert on frontier African markets and former member of President Barack Obama’s Advisory Council on Doing Business in Africa – said certainty about the business and policy framework, interest rates and foreign exchange rates were big considerations for potential investors.
Asked what South Africa could do differently to improve its economic growth outlook, Cook warned that the turnover in finance ministers, questions about the utilisation of government funds and the “bottomless pit” at some state-owned enterprises were all areas of concern.
“I think it would be very productive to liberalise and privatise some of the state-owned enterprises whether it is Eskom or SAA or Transnet to force them to become more competitive and then that also, I think, would lead to further innovation.”
Finance minister Malusi Gigaba will be under pressure to address corruption and wastage at state-owned enterprises when he presents his maiden Medium-Term Budget Policy Statement (MTBPS) to Parliament on Wednesday. With economic growth and tax revenues lower than anticipated, analysts expect the budget deficit to deteriorate significantly and Gigaba will need to demonstrate that government is serious about sticking to its path of fiscal consolidation, but it is highly unlikely that state-owned enterprises will be privatised.
Cook said innovation has been an engine of growth in Kenya as well as Nigeria. South Africa has the same potential, but it has a significant challenge with regards to its level of education.
“In this increasingly competitive world that we live in where automation is a factor, your workers need to be capable of developing new skills as they work and I don’t think the South African education system has really helped young people to develop and that is why you have such high unemployment.”
Frontier markets
Cook said particularly in frontier markets in Africa (South Africa is considered an emerging market), there is often a mismatch between the thinking of governments around their needs and competitive advantages for attracting investment, and investors, who are fiduciaries for the beneficiaries of their funds.
“It is not the job of private sector investors nor frankly should it be the job of governments to blindly invest just because they think that they need something.”
She said it is clear that many governments needed infrastructure to fuel growth, but without a framework that worked for private sector investors, it is difficult to create a sustainable power sector (for example). It is therefore important for governments to merge their thinking with that of the private sector to attract investments, achieve their growth goals and add economic value.
While a government might need roads to be built, such projects were unlikely to entice investors because there was no revenue associated with these roads. It is arguably easier to lure investors to sectors like ports, railroads, airports, communications or power where there is a very clear revenue stream associated with the investment which could be securitised in some way. Basic education, basic roads and some level of primary healthcare should be the government’s responsibility, Cook argued.
An investment that generated a return of less than its cost of capital is destroying value. This was the basic premise for portfolio as well as foreign direct investment, but the concept is not very well understood by governments on the continent and to a large degree by smaller family companies in the private sector who often have to compete with Chinese firms, she said.
“The cost of capital in Asia is very, very low and they are able to accept very low returns and if you come into a market like Kenya or Nigeria where the bank rates are in the high teens you as a local company have a very difficult challenge.”
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