The heightened policy uncertainty, revealed by the North-West University (NWU) School of Business and Governance’s latest quarterly Policy Uncertainty Index (PUI), shows an urgent need for South Africa to “get the politics right in order to get the economics right” to promote the policy certainty that is fundamental for growth.

Presenting the second quarter PUI in Rosebank, in Johannesburg, on Tuesday, NWU's Professor Raymond Parsons explained that the index increased from 51 in the first quarter of the year to 53.1 during the second quarter, shifting further into negative territory.

An increase beyond the 50-point baseline reflects heightened policy uncertainty, while a decline in the PUI means reduced uncertainty.

“There is no surprise that the PUI moved further into negative territory,” he said, pointing out that, for better outcomes, an enhanced collaborative effort was necessary and trust and confidence needed to be rebuilt.

“There is an important message here, given the cumulative impact of all that has happened [in a climate of no trust and no confidence],” he added.

Over the past few years, policy uncertainty in South Africa has steadily increased, contributing to sluggish growth and inhibiting meaningful investment and consumption.

SERIES OF COMPOUNDING IMPACTS
While global economic activity is picking up and, in effect, recovering to its best levels since 2008, with widespread evidence of a long-awaited cyclical recovery in investment, manufacturing and trade, the South African economy is still struggling.

“We can’t hide behind the world economy and say that it’s placing pressure on us. Seen as a whole, the global economic outlook remains supportive of the South African economy,” Parsons commented.

South Africa’s business cycle has been in a downswing for about 44 months, making it the second longest in the country’s history, and its economy had dipped into a technical recession in the first quarter of this year.

“The main culprits driving South Africa into recession in the quarter were generally poor exports, low government expenditures, higher unemployment, weak consumer spending and stagnating private sector investment,” he explained.

While the “bright” economic spots are growth in mining and agriculture, the consensus is that it is not enough to counter the downward trends of other sectors, particularly manufacturing.

“The balance of good and bad news suggests to us that we would be lucky to get 0.5% economic growth in the next quarter,” Parsons said, pointing to the fact that much economic evidence suggested a close to 0% economic growth rate.

Further shadows are cast by Moody's sovereign risk credit rating now sitting only one notch above junk status. Standard & Poor and Fitch downgraded South Africa to junk status in April.

In addition, the country faced the impact of the reviewed Mining Charter, published in mid-June, which sparked widespread negative backlash from the markets and the mining sector, with “a big wave of uncertainty” holding serious implications for investment in the sector.

Also in June, Public Protector Busisiwe Mkhwebane released her findings against Absa and Bankorp, while also recommending that the mandate of the South African Reserve Bank (SARB) be changed to replace the emphasis on “protecting the value of the currency” with a “transformation-led” agenda.

Many believe the Public Protector over-reached legally and economically, leaving in her wake residual doubts and uncertainty, despite her latest decision to back down from SARB’s defensive court challenge.

This development has unleashed widespread negative reaction and opened up what Parsons described as a “Pandora's box” of additional risks for markets and rating agencies, including launching debates such as the nationalisation of the bank and inflation targeting.

“It is perhaps a reflection of the low levels of trust and confidence in South Africa at present that the motives and intentions of such a suggestion should elicit much unease and future uncertainty,” he said.

“Although all this may well still be well ahead in time, it nonetheless adds another degree of unnecessary uncertainty to the future policy environment.”

In addition, all eyes remain on new Finance Minister Malusi Gigaba and the delivery of his first Medium-Term Budget Policy Statement in October, where the “real test of fiscal discipline” will be reflected and whether any fiscal shocks will emerge.

"The future levels of policy uncertainty will rest on how previous commitment to fiscal consolidation fares with the new political team at the National Treasury,” he explained.

Further, the SARB is set to weigh these factors when it makes its monetary policy decision at the Monetary Policy Committee (MPC) meeting next month.

“Having previously stated that a recession was unlikely, but with inflation coming down below 6%, together with a relatively stable rand and lower fuel prices and combined with an unanticipated recession, [and an uptick in Purchasing Power Index in May] is the SARB closer to the moment it might consider beginning to cut interest rates?” he questioned.

Parsons believed the MPC would remain cautious at this stage, given both external and domestic factors.

Meanwhile, the outcomes of the African National Congress policy conference would only be reflected in the next PUI and would influence perceptions about policy uncertainty “for better or worse”, Parsons noted.

The aggregate PUI for the quarterly period is the average of news-based uncertainty; economists' views on uncertainty; and the Bureau for Economic Research manufacturers' views on political/policy constraints and is published in January, April, July and October of each year.

The PUI was at 38.8 in the fourth quarter of 2016.