Business Maverick


Five reasons South Africa is failing economically

Five reasons South Africa is failing economically

Is there any more fundamental question than this: Why is the South African economy failing?

A research team at PwC called Strategy& puts out an occasional publication on South Africa’s economic outlook. In its latest document, it comes to this conclusion: “If economic growth was a car, SA would be driving at 60km/h while the global average is above 100km/h.” The supposition is based on a simple comparison between the average economic growth of four entities: the world; the G7; something the group calls the E7 — Brazil, China, India, Indonesia, Mexico, Russia and Turkey; and SA.

In 2021, SA underperformed all of these groups, and it seems likely it will again underperform them in 2022 and is forecast to underperform them again in 2023. The vital statistics of the E7, the group in which you would think SA naturally belongs, are 7.5% growth in 2021 as the world rebounded from Covid, 3.4% this year, and a growth of 4.2% next year.

SA’s long-term average of 1.5% growth is a smidgeon higher than the G7 (hallelujah!), which is 1.4%. But it’s much lower than the world’s long-term average of 2.6%. Hence, the motoring analogy indicating SA would be travelling at a legal speed in built-up areas. That is of course fictional; South Africans generally consider speed limits to be broad suggestions at best, hints at worst.

None of this, PwC points out, has been missed by SA investors and corporates. The value of SA’s outward foreign direct investment stock reached R3.1-trillion in 2019, which is double what it was in 2012.

The real eye-opener that PwC cites comes from research house White & Case, which shows that the value of outward M&A activity by South African companies, ie, deal activity by local businesses into the rest of the world, reached R222-billion in the second quarter of 2022. 

“This was the highest on record based on data going back to 2006. While this large sum was certainly linked to a few mega deals (worth R114-billion), outward M&A excluding mega deals (valued at R107-billion) was also the highest in six years.” 

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I think there are five reasons the SA economy is underperforming, and why investors are seeking value outside the country rather than inside.

  1. SA’s immediate political future is likely to be very turbulent. Two things are likely to happen in the next election, both of them bad. The ANC will fall below 50% of the total vote. In response, the party will have to cut a broad deal with the EFF, or it will have to cut many smaller deals with other parties.  If it cuts a deal with the EFF, what we will get is a kind of Zanu-PF “lite” policy, with the Radical Economic Transformation agenda on the front foot. If it cuts a deal with the smaller parties, the result will be political confusion and instability.
  2. The ANC is absolutely wedded to three economically deleterious policies: dirigiste economic interventionism, cadre deployment and BEE. All three of these economic ideas have their upsides and downsides, depending on your political point of view. But the way each is evolving in SA has really serious unintended consequences. Collectively, they are cementing corruption into the economic system in ways that few talk about openly. But if you follow the money, it’s clear what investors really think.
  3. SA’s inequality is proving very enduring, and without a fairer society, economic growth will tend to be stunted. It’s often argued that SA’s social pensions system could bring about a longer-term levelling of incomes. It is an extraordinary programme; a triumph of social policy and organisational expertise. About 50% of all South Africans receive a social grant, and for around 30% of the total, it is a crucial component of their income. The government currently spends about R200-billion a year on the grants system.
    The problem is that compared to the total income of all South Africans, which is around R4.7-trillion, this is not enough to move the needle when it comes to levelling the society. Even the amount the government spends on its own employees massively contributes to enduring inequality. The total state-sector salary bill is now just under R700-billion, more than three times the amount it spends on the social grant system. With this level of inequality, social problems are going to remain endemic for the foreseeable future.
  4. The Zuma-era corruption has hollowed out SA’s key transport and electricity infrastructure, invisible at the time. The new Eskom and Transnet managements are doing an extraordinary job trying to fix the problems, but when you are running an organisation that is functionally bankrupt, it won’t be surprising if the financial problems just overwhelm the management.
  5. SA has lost or is losing its “can-do” culture in favour of an “everybody owes me” culture. There are plenty of fabulous examples of extraordinary entrepreneurialism and social consciousness, but the more SA underperforms economically, the more these crucial social bonds fray.

Has SA reached the point of no return? I don’t think so. Every day now, you see progress to address these issues; it’s just not enough, neither is it fast enough. State Capture suspects are being arrested. Real efforts are advancing to boost local investment. And even based on the outlook of Strategy&, SA will still grow a bit economically. Yet, to say SA is on the wrong path would be a massive understatement. DM/BM

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Comments - Please in order to comment.

  • virginia crawford says:

    Corruption, incompetence and cadre deployment, a toxic brew that has ruined so much.

  • Johan Buys says:

    Simpler : we spend badly and we have too many kids. As % of GDP we spend twice what China does, yet they have 15y longer life expectancy. China’s education outcomes embarrass ours – again with us spending almost double what they do. China averages 1.5 kids per woman, we average 2.5 kids per woman. Poor families with poor health care and education having too many kids perpetuates inequality. AND IT IS NOT BECAUSE WE DON’t SPEND ENOUGH!

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