credit rating economic development economic policy

We require another historic turnaround

IT IS still too early to tell how the post-apartheid creation story will be told. But I suspect one of the founding tales that will endure is that of a new administration that inherited a near-bankrupt state (with junk status at S&P and Fitch) and turned it around into an investment-grade economy. It is a tale of how inflation was reined in, debt repaid and kept at manageable levels, and fiscal deficits tamed despite pressing socioeconomic needs that may have tempted riskier policies.

These early successes on the macroeconomic front are fraying and the political support that made them possible is no longer assured. But one cannot take away how far the country has walked towards stable fundamentals. This is a track record to be defended vigorously.

The trouble is that macroeconomic stability is only part of the puzzle when it comes to economic success. The countries that top the charts, be it on creditworthiness or competitiveness, have done far more than draft good budgets or raise interest rates timeously to earn their renown. Countries such as Norway, Germany and South Korea are also known for their high levels of productivity, their innovation as well as their competitiveness.

SA needs a similar turnaround to that mounted by early administrations, but this time focused on its structural foundations. There is near unanimity that the economy lacks competition and dynamism in its product and labour markets. Low levels of confidence have taken a toll on investment. Growth statistics show gross fixed capital formation fell 2.8% in the last quarter of 2015. This saw investments in fixed assets by the general government and the public sector falling, with public corporations the only segment to register growth.

It is not surprising that the category of investment that has seen staggering declines (33% in the last quarter of 2015) is that which includes research and development. In tough times, outlays on securing future wealth are cut. This is one way in which an uncertain economic environment undermines growth and dynamism.

The modest response of exports and the trade balance to a significantly weaker currency has also been revealing. This speaks partly to global demand conditions, that some products are already priced in dollar terms and exports require intermediate imports. It also highlights supply-side constraints, which means our firms cannot easily expand their production even when their goods become relatively cheaper.

In its ratings review last week, S&P Global Ratings pointed to energy supply, labour reform, the regulation of black economic empowerment in mining and the political economy as key structural constraints that will inform its ratings decisions in the next six months. But for the long term, the country needs to fix far more than what this and other ratings agencies have trained their focus on.

This week, I will be participating in a workshop at the Reserve Bank that seeks to explore the appropriate policy responses to the productivity challenge. These will encompass human capital, trade, labour, competition and other policies.

SA needs to get unstuck so that it can move on to the next phase of post-apartheid economic reform. What is clear from the statements of ratings agencies and other international observers is that we can no longer coast on the past record (albeit under threat) of macroeconomic policies and institutions. In fact, those institutions have limited tools to influence what happens in the delivery of basic education, how labour markets are regulated, or the pace at which infrastructure is rolled out. Whereas targeting inflation or maintaining the deficit is largely the preserve of the government, microeconomic reforms require far more co-operation and co-ordination with other parties, especially the private sector. This kind of partnership seems within reach, but demands resolute leadership to sustain.

Makhaya is CEO of Makhaya Advisory

This column first appeared in Business Day here

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