Despite fingering fiscal policy, labour legislation and infrastructrure as obstacles to growth, Dr Roelof Botha, economic adviser to PricewaterhouseCoopers, remains optimistic about the economy. Cornelia du Plooy reports.
Reflecting on the medium-term prospects for the economy has become a rather pleasant exercise, as most key variables continue to point towards relatively strong GDP growth. In fact, the country is currently enjoying its longest sustained growth phase in modern history. The current upward phase of the business cycle has endured for 95 months, more than double the previous record of 44 months, which was reached once during the early 1960s and once during the late 1970s. Monetary policy contributes to inflation U nfortunately, however, the economic landscape is not without its blemishes.
The first and most obvious problem is higher price levels, caused mainly by the higher oil price and the international shortage of staple grains. T he Reserve Bank’s reaction was to implement policies designed to “cool down” the economy once the 5% growth level was breached. This casts doubt whether the government’s official economic growth target of 6% will be reached. I n contrast to the situation early last year, the Reserve Bank has increased interest rates six times in the past financial year, with the prime overdraft rate now at 13,5%. As a result, the cost of capital for business has increased by more than 28%, a significant portion of which will undoubtedly be shifted on to consumers.
Paradoxically, the monetary authorities are contributing to higher inflation as a result of their stricter policy stance. The inflationary impact of this policy will also be felt in industry, where demand may taper off as a result of the higher cost of credit. This will be manifested in higher overhead costs per unit, which are also largely passed on to consumers. Labour legislation affects productivity A second area of concern is the government’s inertia in dealing with the country’s rigid labour legislation. According to the Standard Bank’s Economics Division, this legislation means employers are less willing to take on more permanent staff, while labour law bias in favour of trade unions also continues to place a damper on incoming foreign direct investment.
In his State of the Nation Address two years ago, President Mbeki reassured the business fraternity that government was mindful of the negative impact on costs and productivity of the plethora of new regulations that had been enacted, especially since the late 1990s. president even hinted at the possibility of establishing a dual regulatory environment for labour issues – one set of regulations being applicable to relatively large employers and a less cumbersome one to small and medium-sized firms. Unfortunately, this promise has not been fulfilled. A third key obstacle to higher economic growth is the parlous state of the country’s economic infrastructure. Thirteen years of democratic rule have witnessed a welcome return to fundamental macroeconomic stability, including low inflation and a sharp decline in the ratio of public debt to the GDP. However, this has come at a high cost, with serious neglect of the maintenance of the country’s roads, harbours, water reticulation system and electricity supply network.
Furthermore, an alarming lack of vision from the relevant authorities has resulted in almost no new capacity being created, despite the obvious sustained expansion of economic growth. The electricity situation has become quite precarious, with Eskom issuing warnings of blackouts for several years to come as it faces regular outages of its electricity-generating units. On balance the trends are positive Fortunately, positive trends in key indicators outweigh the above obstacles to growth by a considerable margin. These include: Three successive years of substantial fiscal revenue overruns, contrasting a 20-year period when there was no government saving with the prospect of a balanced current expenditure budget.
Prospects for lower interest rates early next year, due to a fairly stable currency; stable oil prices; a recovery of agriculture; and lower levels of consumer expenditure. The impact of the 2010 Soccer World Cup, which is stimulating capital formation in a large variety of sectors and which will undoubtedly be accompanied by high growth rates in tourism-related sectors. Indications of a long-term upward trend in commodity prices as the world’s two most populous nations, China and India, continue to record high rates of real growth. Strong formal-sector employment creation since 2003, which has enlarged the country’s middle class and broadened the base of both taxation and aggregate demand in the economy.
Exceptionally high levels of domestic capital formation, which is more broad-based (in terms of the different sectors of the economy) than at any stage in the past three decades. This list is quite impressive and depicts an economy that is capable of forging ahead at a growth rate of at least 5%. Viewed objectively, however, this is probably a short- to medium-term growth ceiling. The impediments to higher growth discussed above, combined with potential balance of payments constraints, will prevent South Africa from reaching the Asgisa growth target of 6% – at least until the country’s electricity supply capacity has been expanded, skills levels improved and other supply-side deficiencies have been removed. For the time being, a growth rate of close to 5% has become fairly predictable and is certainly an improvement on the average growth rate of only 3% experienced during the first decade of democracy. Two events will exert an indelible impact on the country’s medium-term to long-term economic prospects – the inauguration of the third president of the democratic era in 2009 and the Soccer World Cup in 2010.
A new president who embraces policies that are essentially market-friendly and designed to enhance the level of economic activity, combined with hosting the world’s largest single event, will almost certainly move South Africa closer to the 6% growth target. If greater sociopolitical stability is created within SADC by peace in the Democratic Republic of Congo and Mugabe’s imminent retirement, regional growth could become more sustained and even start edging past 6%. Contact Dr Roelof Botha on [email protected]. |fw