The North-West University (NWU) Business School’s Policy Uncertainty Index (PUI) rose to 59.7 during the first quarter of the year, from 53.2 in the fourth quarter of 2021, but may recede from its present abnormally high point in the months ahead as different perspectives unfold, says NWU Business School Professor Raymond Parsons.

The rise in uncertainty seems to have been mainly driven by the big shock and heightened global economic unpredictability arising from Russia’s invasion of Ukraine, which also reinforced some continued domestic uncertainties.

However, this year could still be a turning point for the South African economy. Accelerated economic reforms, building State capacity, improving delivery, higher total fixed investment and stronger business confidence are affirmative factors still urgently needed to boost economic performance.

“South Africa must concentrate on the factors over which it has control. The ball, therefore, remains in the country’s court,” he says.

Until the recent strong global shock intervened, a number of evolving domestic factors might well have tipped the balance of the PUI for the first quarter in a more favourable direction to below the 53.2 of the preceding quarter.

The Medium Term Budget Policy Statement, in November, delivered a credible message about South Africa’s growth and fiscal metrics. This augured well for the main Budget in February.

Further, towards the end of 2021, the credit-ratings agency Fitch also raised its outlook for South Africa from negative to stable.

During this time, It was also apparent that the country was likely to end 2021 with a strong rebound in the economy of about 5% in gross domestic product (GDP) growth, compared with the pandemic impact of a 6.4% contraction in 2020.

“Although the further relaxations to the Level 1 lockdown restrictions came only at the very end of 2021, they were positive for business and consumer confidence. Economy-linked Covid-19 rules were further relaxed on March 22,” the PUI points out.

Further, February saw a well-received State of the Nation Address message from President Cyril Ramaphosa that recognised the private sector as the main driver of investment, growth and job creation in South Africa.

Ramaphosa undertook to promote a policy environment which would make this possible, including a reduction in ‘red tape’ on business through the creation of a special unit in the Presidency.

“There has also been the recent successful long-delayed radio frequency spectrum auction and the fourth Presidential Investment Conference on March 24 appeared to have created positive investor perspectives,” the NWU PUI notes.

The main 2022/23 National Budget, in February, was also broadly supportive of the economy, including a commitment to tough love for dysfunctional State-owned enterprises.

Additionally, corporate tax was reduced from 28% to 27% and additional assistance to small, medium-sized and microenterprises was made available.

“The subsequent 2050 National Infrastructure Plan accepted by the Cabinet is intended to hold the government accountable for developments in this sphere. The work and outcome of the Zondo Commission on State capture and corruption has also enjoyed wide support,” the report says.

However, inflation expectations among analysts, business people and trade unions have increased slightly. Domestically, both the Consumer Price Index and the Production Price Index (PPI) became elevated in the second half of 2021.

The South African Reserve Bank (SARB) Monetary Policy Committee (MPC), therefore, initiated an interest rate-raising cycle.

“Borrowing costs are set to rise further in the months ahead, with forecasts suggesting that the next MPC meeting is likely to see another increase of 50 basis points.”

INFLATION CHALLENGE

The combination of war, sanctions, supply chain disruptions and geopolitical factors has impacted on global growth and inflation, together with heightened market uncertainty and volatility.

The US Federal Reserve has raised interest rates, with further increases expected during the year. The rand has so far remained resilient and, while the real South African economy has remained largely unaffected, it is unlikely to escape the global trends of rising energy and food prices, the NWU PUI states.

“[South African] PPI had already accelerated by 10.5% in February, which was much higher than market forecasts. Inflation risks have risen. Consumer confidence in the first quarter, in particular, was already negatively influenced by adverse perceptions about the global economic fallout from the Russian-Ukraine war,” the report notes.

The overall global economic outlook in the first quarter of this year has inevitably been considerably reconfigured by the Russia-Ukraine conflict. Among other forecasters, the SARB has cut its expectation for 2022 global economic growth from 4.4% to 3.7%.

“The world is also facing its most serious inflation challenge in a generation and, eventually, bread-and-butter issues may well trump crises in faraway countries. There remains huge uncertainty about the course of the war, as well as [Russian] President Vladimir Putin’s intentions, and the capacity of European countries to sustain long-term economic pressure on Moscow,” the NWU PUI points out.

“At a practical level, if South Africa is to take advantage of the current shifts in the world economy, it must remain globally competitive by providing, for example, energy security, as well as ensuring an efficient rail and port system that enables exporters to successfully access foreign markets.

“What 2022 must see is for South Africa to speedily implement a wide range of half-forged policies and projects that will help to create a growth environment that is solid and coherent.”

The latest South African Reserve Bank Quarterly Bulletin, published in March 2022, shows that, although there has been some recovery in private fixed investment, total fixed capital formation declined from 13.7% of GDP to 13% in 2021.

To support the growth rates of 4% to 5% needed to substantially reduce unemployment, total fixed investment in South Africa is required to eventually approximate about 25% of GDP.

“Therefore, 2022 could still be a positive turning point for the economy. If South Africa wants to successfully manage the balance of risks, absorb the pressures and exploit the opportunities that may emerge from the Russia-Ukraine conflict, the basic narrative remains unchanged, namely that the country must get its economic house in order,” the NWU PUI says.