Africa-Press – South-Africa. The political environment in South Africa remains a significant constraint on investment and economic growth, with it being a major contributor to the country’s low business confidence.
This environment has been characterised by widespread corruption, onerous regulatory requirements, and little decisive action intended to ignite economic growth.
As a result, businesses have decided to accumulate over R1.8 trillion in cash reserves rather than invest heavily in the local economy by expanding their operations and employing individuals.
This has translated into poor economic growth over the past decade, with South Africa’s economy growing at an average annual rate of 0.8% since 2015.
Various analysts from Coronation and Old Mutual to Stanlib and Standard Bank have highlighted the negative effects of South Africa’s political environment on businesses.
Coronation’s economics unit explained that there is a close correlation between fixed investment in equipment, machinery, and infrastructure, and economic growth.
It also found that there is a strong inverse relationship between the perceived political constraint in South Africa and fixed investment from companies.
As the political environment is perceived to be more uncertain and less conducive to private businesses, and regulations become more onerous, private investment declines.
This has been the case over the past 15 years, with private sector investment declining from over 16% to below 10% in recent years. As a result, economic growth slowed significantly.
The only time this picture of decline changed was when peak load-shedding resulted in generation restrictions on private energy projects being lifted.
This resuscitated private investment to an extent, with the momentum since moderating as projects came online and load-shedding became a thing of the past.
Coronation said a deterioration in the political environment from 2012 onwards has contributed to weaker business confidence and a reluctance to invest.
This can be seen in the graph below, with the political constraint index shown on an inverse scale on the right-hand side.
Crisis of confidence
South Africa has been experiencing a 15-year-long crisis of confidence in the local economy, with business confidence only being in positive territory for two months of that period.
Without confidence, businesses are unlikely to invest in expanding their operations in South Africa, preferring to wait-and-see for better opportunities in the future.
Stanlib chief economist Kevin Lings explained that business confidence is typically a result of stable policies and regulations that encourage investment, combined with the belief that there will be a return on investment in the local economy.
Lings said that South Africa’s political climate has been the biggest handbrake on the local economy since 2008, preventing businesses from investing in the country.
In the late 2000s, things changed significantly in South Africa, with Jacob Zuma ascending to the presidency and beginning to make appointments to key positions based on personal preference rather than merit.
During this period, Old Mutual chief economist Johann Els explained that concerns began to grow about South Africa’s policy direction and trust in the individuals running the country began to decline.
As these concerns grew, investment in the country dried up, and economic growth collapsed. This was coupled with a rapid increase in government spending, resulting in the state’s debt load soaring, further eroding confidence.
South Africa’s strong GDP growth during the Mbeki era stopped almost instantly, and the country’s debt rapidly increased.
Els said studies from economic institutions indicate that the declining confidence in South Africa has cost it one percentage point of economic growth per annum over the past decade.
This has been corroborated by research done by Standard Bank, with chief economist Goolam Ballim explaining that the political climate is the number one reason businesses hesitate to invest in the local economy.
“It may sound a little academic, but it is something that I support quite vigorously, and that is the rule of law or good governance. I treat those two as synonyms,” Ballim said.
“By the rule of law, I am referring to the overall governance climate within a country that is vital to attract investment locally and abroad.”
Analysis from Standard Bank’s economics unit shows that around three quarters of investment and economic growth hinges on the rule of law and good governance.
The remaining one quarter is made up by capital, innovation, labour dynamics and everything else in an economy, reflecting just how important the rule of law is.
“I am making a bold statement here. I have said it before, and the data supports me in saying that governance is about two-thirds to three-quarters of the economic growth of a country,” Ballim said.
“And so, continued improvement in the governance structure will be the bedrock of enhancing predictability, efficiencies, and increased private sector participation in the economy.”
“So, if you want to say what the silver bullet is, I’d say it is the rule of law.”
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