The challenge this year will be to reduce policy uncertainty further, as confidence-building is said to be the cheapest form of economic stimulation, and accelerated economic reforms, higher fixed investment and stronger business confidence need to be backed by policy certainty, the North-West University (NWU) Business School Policy Uncertainty Index (PUI) for the fourth quarter of 2021 states.
South Africa must, therefore, mobilise and implement a range of existing half-forged policies and shovel-ready infrastructure projects to help create a growth environment that is solid, coherent and employment-friendly.
“Among the fundamental structural reform items is policy certainty. Simple, but fundamental to the investor community. Remember that you cannot force people to invest, but you can create an environment which makes it easier to invest, create jobs and develop the country,” former Finance Minister Tito Mboweni said in December.
Key platforms, such as the State of the Nation Address, in early February; the main Budget Speech, later in February; and the next Presidential Investment Conference, in March, must be used to create an economic environment that is conducive to inclusive, is job-rich growth and promotes policy consistency and coherence, the NWU Business School says.
The NWU Business School PUI declined to 53.2 in the fourth quarter, from 58.2 in the third quarter, but was still well in negative territory. The negative factors that caused the big spike in the third-quarter PUI diminished in the fourth quarter.
“Structural impediments to a strong economic recovery remain, unless economic reforms are prioritised. For example, an acceptable existing growth roadmap, the Economic Reconstruction and Recovery Plan, still awaits full recognition and implementation,” the PUI report says.
Further, towards the end of the fourth quarter of 2021, overall global economic growth rate forecasts, although still positive at about 5%, were being trimmed as a result of the impact of Covid-19 Omicron variant restrictions in several countries.
The media data for the fourth quarter PUI showed a slight increase in references to policy uncertainty, while surveyed economists, on average, believed policy uncertainty was the same, or a little lower.
Further, Stellenbosch University’s Bureau for Economic Research survey of manufacturers experiencing policy or political uncertainty declined from 84 to 79.
SOUTH AFRICAN ECONOMY
During the third quarter of 2021, negative factors greatly eclipsed positive ones to push the PUI much higher, including the serious civil unrest in July, the move to lockdown Level 3, Eskom load-shedding, record-high unemployment figures, uncertainty around the pending local elections and continued implementation risks around various policies and projects, such as energy policy.
This was eventually also reflected in the worse-than-expected 1.5% gross domestic product (GDP) economic contraction in the third quarter of 2021.
“Though the PUI remains well in negative territory, policy uncertainty in the fourth quarter of 2021 was lower than it was in the third quarter. Some of the factors causing the third quarter 2021 PUI to strongly spike subsequently began to diminish.
“One positive element was the key Medium-Term Budget Policy Statement, in November, which delivered a positive message about South Africa’s growth and fiscal metrics. Then the South African Reserve Bank’s composite leading business cycle indicator rose marginally in October. The South African stock market also ended 2021 with its best performance in 12 years, with all its components higher for now,” the NWU PUI shows.
However, the fourth-quarter PUI remained elevated and in negative territory, which can be partly ascribed to the initial uncertainty stemming from the emergence of Omicron and the imposition of travel bans on South Africa by about 30 countries. Although a few of the travel bans have been lifted, considerable economic damage had already been done.
"Yet, given various structural impediments, South Africa’s economic recovery is expected to be weak compared with peer countries, unless economic reforms are prioritised," the NWU PUI highlights.
Meanwhile, it is likely that South Africa will see a 5%, or slightly less, economic ‘rebound’ for 2021 as a whole, compared with the big 6.4% GDP growth loss in 2020, which was a much larger drop than the emerging markets average of 2.2%.
“The momentum behind the rebound in the economy is now largely behind South Africa. High-frequency economic data in the fourth quarter of 2021 have been mixed. Encouragingly, the ongoing strong performance of the agricultural sector is a major bright spot on South Africa’s economic horizon in 2022,” the report states.
Recent growth expectations for South Africa for 2022 have ranged from a pessimistic 1.4% by the IMF, to a more optimistic 2% by ratings agency Fitch. The official Medium-Term Budget Policy Statement in November projected an average growth rate of 1.7% over the next three years.
“Most of these latest conservative growth prognostications are in any case barely above the population growth rate and are, therefore, inadequate for a developing economy like South Africa. Policies in 2022 must be geared towards doing better in the face of the socioeconomic red flags raised by these low growth forecasts,” the NWU PUI notes.
“Growth in South Africa has therefore been too low for too long. In 2021, the level of fixed investment dropped to an 18-year low. Given South Africa’s immense socioeconomic challenges it needs a more robust, inclusive growth over the next few years, faster than the Medium-Term Budget Policy Statement average of 1.7% growth, powered by much higher levels of private and public investment.
“Greater policy certainty needs to play a critical role here. Policy uncertainty permeates economic activity and development at the local level as well, where serious service delivery failures have had a corrosive impact on business costs and viability.”
There is mounting evidence of where business operations have been badly impaired as a result of chronic uncertainty about the cost-effective provision of basic services and infrastructure at local level. In some worst-case examples firms have been eventually compelled to disinvest from towns where the certainty of essential support services no longer exists, the NWU PUI says.
Additionally, policy predictability also interacts with the mobilisation of corporate cash balances. Many big corporate balance sheets in South Africa are currently looking strong, with cash reserves available for potential real investment.
However, “for as long as you have that heightened policy uncertainty, you will have companies sitting on cash balances and not investing”, said South African Reserve Bank Governor Lesetja Kganyago in October 2021.
The National Treasury’s recent programme to expand and enhance the role of public-private partnerships in infrastructural projects should be expedited, the NWU PUI advises.
“Apart from Omicron challenges, two additional reasons for emerging markets like South Africa to feel vulnerable as the year ended were the intended gradual tightening of US monetary policy and a sharp slowdown in the Chinese economy.
“The prospect of hawkish US monetary policy and a strong dollar usually go hand in hand with a declining global risk appetite. Those economies with a big stake in China as an export market need to grasp the new reality that, even as the Chinese government proceeds to stimulate its economy, the country’s growth rate has fallen to about 5%, which is the lowest in about 30 years. The evolution and restructuring of that economy may mean lower growth levels in future for South Africa as a maturing economy,” the NWU PUI says.
Business news and information company The Economist gathered data relating to key macroeconomic variables for 40 large emerging markets within the context of tighter US monetary policy and slower growth in China, and expects a ‘rocky ride’ for most of these emerging economies this year, especially in terms of their currencies.
“How emerging economies are impacted and how they will respond will largely depend on their domestic economic circumstances and resilience. The centrality of inflation and how it can be handled in existing circumstances dominated global economic debate as 2021 drew to a close. A December report by global body the IMF emphasised that such responses must now be calibrated to the unique circumstances of individual economies,” the NWU PUI emphasises.