SA suffering from poor policy choices

At this time of crisis in South Africa it is not only Government that needs a fundamental change of direction; business needs a new strategy if it is to provide the leadership the country desperately needs.

Standard & Poor's said that it was concerned that South Africa’s “political noise” was distracting the government from implementing policies that would enhance growth. “The risks with regards to accelerating reforms is at the moment easily drowned out by all of the political noise and raging political battles and that certainly is a concern because there is not a lot of time to push some of the biggest reform efforts through the legislative process” said S&P’s MD and sub-Saharan African regional manager, Konrad Reuss. Labour legislation and the minerals and petroleum resources bill are such an example of the delays.

Promotion and Protection of Investment

First we will address a few policies introduced and/or proposed by the South African government over the more recent years starting with the discreet signing of the Promotion and Protection of Investment Bill into law. The Protection of Investment Bill is a legal framework that would supplant the Bilateral Investment Treaties (BITs) first introduced by President Mandela in the mid-1990s as a means of reconnecting post-apartheid South Africa with global capital flows. The act says that foreign investors, or their investments, must not be treated less favourably than South African investors, and that they have a right to property in terms of Section 25 of the Constitution -the Property Rights clause.

The Protection of Investment Act has been stoutly defended by Trade and Industry Minister, Rob Davies, who said the bill would ensure that foreign investors don’t get preferential treatment over local investors but, the Executive Director of the American Chamber of Commerce in South Africa, Carol O’Brien, expects it to deter foreign investors. The American Chamber says it expects investors to think twice before deciding to plough money into the local economy, O’Brien believes it will impact on the inflow of much needed foreign investment; “we think that the companies that are in South Africa don’t really have a problem, but we do think that new investment will certainly look twice at South Africa, especially if you twin it with the expropriation bill; those two bills together are ominous”. The American Chamber isn’t the only sect showing concern over the Investment Bill; South African opposition parties the Democratic Alliance, along with the IFP and UDM, criticised the bill as likely to “choke off foreign investment” at a time when the economy is already struggling. Eyewitness News (2016) reports DA Member of Parliament Geordin Hill Lewis saying, “This Bill is no welcoming invitation to the world. This is a big neon sign, on the shop front window of South Africa that screams: 'Closed for business’”. President Jacob Zuma’s signing into law the contentious Protection of Investment Bill has sparked concern that another controversial Bill, which has been fiercely criticised for thwarting growth and investment, could be next in line. The Private Security Industry Regulation Amendment (PSIRA) Bill has been awaiting Zuma’s signature since it was passed by Parliament in 2014.

Private Security

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A proposed amendment bill that would ban majority foreign ownership of security companies in South Africa. One of the clauses in the bill –which private security companies are strongly opposed to– requires at least 51% local ownership of foreign-owned private security companies. Costa Diavastos, president of the Security Association of SA, said the big four foreign security firms’ investment into South Africa over the past eight years came to about R4.5 billion. The Mail & Guardian (2014) reports that the ministry of police says it is a matter of national security and has dismissed fears about divestment. It has stated that, in implementing a foreign ownership cap, the correct procedures must be followed to protect investments and respect South Africa's international trade obligations. The ownership clause has received a considerable amount of opposition, many stating that it was unconstitutional as a forced sale of an asset would amount to arbitrary or irrational deprivation of property.

Land Expropriation

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The Land Expropriation Bill sets the rules under which the state can lay claim to urban and rural property. Expropriation entails the government purchasing movable and immovable property from a natural and/or juristic person for a public purpose.

The old Expropriation Act did not determine a formula of how compensation would be determined within the act, but opted to utilise the concept of “willing buyer and willing seller” in order to determine compensation. The ANC-led government after the adoption of the constitution, also utilised the concept of “willing buyer willing seller” in the context of both expropriation and land reform. Contrary to the latter, the constitution makes provision for “just and equitable” compensation. The Expropriation Bill, therefore, formally marks a deviation from a policy of compensating expropriated property solely based on the market, to one that will take into account “just and equitable” compensation. Lack of legislative clarity on how to proceed constitutionally with expropriations has been extremely costly to the country, as may be noted with the dip in Foreign Direct Investment (FDI) into South Africa between 2014 and 2016.

The Macro

Macro-economically, several factors influence and hinder the economic growth of South Africa. The South African Rand, as a commodity currency, is very reactive to any changes in the strength of commodity prices and the weakening of the commodity prices throughout the months has been quite impactful to the strength of the Rand. With China’s slowing growth it is doubtful that their demand will push up commodity prices, which means the Rand is unlikely to get much stronger. Chief economist of Standard Bank, Goolam Ballim cited another factor currently influencing the Rand is that it is undervalued, which means the rate at which it can be exchanged for other world currencies is too low. Of course, the strong Dollar and South Africa’s current account deficit could result in a weaker Rand for the near future.

The weak rand has a number of implications for the country’s growth prospect. Firstly, the weakening currency carries the risk of pushing up inflation because imported goods are more expensive. This means that the South African Reserve Bank faces a difficult decision. It can keep interest rates low but then faces even higher inflation. This will only devalue the rand further. If the central bank takes more aggressive action by raising interest rates, it risks stifling growth in an economy that is only expected to grow at .5%.

Recommendations

Broad-Based Economic Empowerment

Broad-Based Economic Empowerment (B-BEE) needs to be scrutinised and reviewed in order to ensure that it is not only the Black elite that benefit from this policy. The government needs to provide structured funding through DFIs to co-operatives and community organisations in order to enable them to buy into existing companies and encourage economic growth within communities.

Private Security

When targeted schemes are pursued, care needs to be made to ensure that they are well targeted and fiscally affordable. It is also important to avoid approaches that strive to “pick winners” or create complex procedures and selection criteria that create excessive additional administrative burdens for Government or discourage participation by possible beneficiaries. Evidence on the effectiveness of targeted incentives generally suggests that such measures rarely attract additional investment, are costly, and often distort incentives that lead to further resource misallocations.

Promotion and Protection of Investment

Investors are drawn to locations that facilitate their participation in the competitive global environment. This involves factors such as the general business framework (ease of entry and exit, fairness and speed of dispute settlement), existence of supply networks, adequacy and cost of infrastructure, and availability and quality of technical and professional services. Beyond such general incentive programs, one relatively straightforward means to stimulate FDI would be to accelerate the pace of privatization of major state-owned enterprises (SOEs).

Land Expropriation

In order to address the land issue, government needs to purchase properties/ lands at market value rather than what it considers to be “just and equitable”.

Micro and Macroeconomic Environment

Government needs to address uncertainty from the macro environment first by stabilising domestic political noise. Then, government must place accelerated growth and employment at the top of its policy agenda. According to Executive Director at the Centre for Enterprise and Development, Ann Bernstein, South Africa also needs one credible new strategy for inclusive growth in the country. Furthermore, the country needs jobs for “the labour force we have, not the labour force we would like to have”.

Thus,

Domestically, South Africa cannot be pro-growth and anti-business. Situations such as the sudden reshuffling of the finance ministry will continue to weaken one of the country’s key macroeconomic institutions and continues to undermine market confidence. At this time of crisis in South Africa it is not only Government that needs a fundamental change of direction; business needs a new strategy if it is to provide the leadership the country desperately needs. On the macroeconomic front, a weaker Rand does have its benefits to the country; it is helping mines stay afloat and gold mines could make profits again as the gold price has held up more than the prices of other minerals. There may also be a boost in tourism.

The weaker Rand may also have short-term benefits for sub-Saharan countries importing substantial volumes from South Africa. Finally, there may be a boost for local exporters. But this could be stifled by the rise in the price of imported raw materials which will contribute to higher costs of production for manufacturers.