Confidence is the key for economic growth

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Craig Kiggen, Regional Head: Kloof KZN, Citadel

 

Recently elected President of the ANC, Cyril Ramaphosa has stated it. As has Finance Minister Malusi Gigaba. Confidence – both business and consumer – can quickly and efficiently provide the boost our ailing economy needs.

Writing about his “New Deal” for the economy, Ramaphosa said, “A restoration of confidence is the quickest and cheapest form of stimulus available”. Gigaba also noted that “we need to rebuild confidence as a matter of urgency” in his 2017 Medium Term Budget Policy Statement.

However, the mood towards South Africa from external investors has spiralled downwards as confidence in the country wanes, a result of the political and policy uncertainty that we have been unable to address as a nation.

The reality is that South Africa – the economic powerhouse of the continent even if not the largest economy – needs to resolve the political stalemate and address the lack of policy clarity, which has contributed to economic weakness and low confidence.

Take for example East Africa, where sentiment remains upbeat. While South Africa offers enormous opportunity, countries such as Rwanda, Kenya or Uganda have enjoyed far superior levels of economic growth despite the unease they themselves have experienced politically, what they are able to do is offer investors clarity of direction and business, creating the opportunity to thrive.

East Africa in, in fact, Africa’s fastest-growing region, with economic growth estimated to be 5.6% in 2017, after posting 4.9% in 2016. Not only that, but growth is expected to rise further to levels that we can only dream of: 5.9% in 2018 and 6.1% in 2019.

In its 2018 African Economic Outlook report, the African Development Bank noted that Rwanda’s experience provides a useful lesson for the whole continent. In 2016 Rwanda was “among the world’s top 10 performers in the (lack of) burden of government regulation”. It is no coincidence that after introducing reforms, the number of new firms created in Rwanda rose by more than 300%, from 700 in 2010 to 3,000 in 2016.

Sadly, South Africa with its uncertainty has isolated itself, even within Africa, and is not growing anywhere near to its potential. Historically, South Africa’s growth has been reasonably closely correlated to global growth but as a result of our political instability in the past two years our economy has largely decoupled from the rest of the world and, sadly, that correlation is now an inverse one.

The pressing challenge now facing Ramaphosa is to turn the tide on negativity towards South Africa.

The good news is that there are certain changes which can be implemented reasonably swiftly. It’s not the politics per se that’s the issue; rather it’s the volatility and the lack of clarity that’s the problem. Now that the ANC electoral conference is behind us, we can hopefully look forward to far greater political clarity and stability.

We have already seen the rand showing some measure of strength in the wake of the ANC conference and this gives us hope for the next level of confidence building. Inward investment into a country is an excellent indicator about what the world is thinking about the investment opportunities within the context that they are looking to invest in.

Confidence also remains high among the 1000-odd members of the Young President’s Organisation (YPO) African Region spread around the continent, leading to robust economic growth. We simply need to replicate that confidence in South Africa in order to start the process of economic renewal.

As Gigaba said, “Demonstrative actions that build business and consumer confidence can encourage global and domestic investment, broaden private-sector activity and boost competitiveness.” This is echoed by the African Development Bank which notes that: “By attracting foreign investment and firms, even the poorest African countries can improve their trade logistics, increase the knowledge and skills of local entrepreneurs, gain the confidence of international buyers, and gradually make local firms competitive.”

From an economic and a political perspective, we need to let the markets know what’s going on and give them direction. Confidence enables and encourages foreign investment which has a ripple effect through the economy. It affects the currency, it has a knock-on effect on inflation and it in turn has a knock-on effect on confidence.

Thus if Ramaphosa and the ANC are able to offer greater political stability while delivering policy certainty to encourage foreign investors, 2018 could be the year that finally turns South Africa around and sets it on the road to fulfilling its potential.