Opinionista Ron Derby 7 November 2019

State must clear the way for promised investments to land

Perhaps it’s just end-of-the-year lethargy or the fact that last week we received a depressing read of SA’s books by the head bean-counters, but there’s been much cynicism about President Cyril Ramaphosa’s second investment conference. How justified is this?

It has been a long year, one where once again confidence levels are at multi-decade lows and growth is going to come in at a measly 0.5%. It may not fit a textbook definition of a recession, but these times do feel rather depression-like on the back of the amount of introspection we’ve been going through. It’s been a heavy therapy session. But maybe we should just for a second consider what the R371-billion investment commitment at the SA Investment Conference means.

The commitment, from South African and foreign companies, was R81-billion more than the R290-billion that was secured last year. There’s an additional R8-billion more awaiting regulatory and board approvals.

Let’s think of it much like a construction company would an order book: it’s the fundamentals of any investment case for a builder, the key indicator of the company’s health. Over the past decade, that order book for SA’s major players such as Aveng and Group Five has plummeted and in turn, so have their share prices and now they are both in precarious positions. Using similar logic, I want to look at how an investor would build an investment case for a country such as ours that has been bereft of any substantial investment over the past decade – except perhaps for a badly executed Eskom expansion project in Limpopo… and we know just how that has panned out.

Before deciding on buying a South African asset class such as equities, bonds or even property on the Atlantic seaboard, the key question to ask yourself is just how much is set to be pumped into the economy over the next three to five years. These spend commitments, even if just money in the ground for maintenance, do paint a picture of the confidence of large balance sheets in the economy. The investment conference in Sandton is really a confidence-building event, a bookbuild for SA Inc.

The smartest investors and those who try not to follow the crowd in making their investment decisions, often focus on one ratio in deciding whether a stock is expensive or cheap: the price to earnings ratio (P/E). In essence, the ratio is meant to define whether the price you are paying for a share now is worth its future earnings.

When investing in South Africa today, any discerning investor, local or international, would need insights into how much our mining sector is going to spend in our rich fields, how much our telecoms players are going to invest in new technologies such as 5G and just what that might unlock in other sectors of the African economy.

So, yes, I get its importance and all my cynicism is removed on this investment summit – it’s clearly a move to regain some of the lost confidence in the South African economy. The key to its success in the real nuts and bolts of the economy is whether the state has the ability to clear the route for these investments to actually land. These relate to issues such as spectrum auction or providing some certainty to debates around mining legislation or the energy sector.

Here may just be President Cyril Ramaphosa’s advantage over his predecessors. Former president Thabo Mbeki was a man for high-level meetings with business leaders, while his successor, Jacob Zuma, was not a man for any meetings with “established” business, as he wanted to create an alternative business structure. Initially, black business thought this would be to their benefit, but it’s clear from the State Capture narrative that it was an alternative structure to benefit the president’s family and friends.

The current president has made it his mandate to closely engage on a departmental level around industry and master-plans such as the New Development Plan. Ultimately, this is the plumbing that will be needed if the investment promises that have been made over the past two years are to leave an indelible mark on the real economy.

So it’s over to you Mr President to unclog the plumbing such as stabilising the biggest stumbling block to escaping our common depression, Eskom, which starts with the appointment of a CEO. That P/E ratio I spoke of earlier, needs to start calling South Africa a “cheap” stock. BM

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