29 October 2018 – Biznews
EDINBURGH — President Cyril Ramaphosa has been conspicuously courting the international investment community as part of his plan to reignite positive sentiment towards South Africa. He has had opinion pieces published in influential global newspapers, such as the Financial Times, in order to drum up interest in business opportunities in South Africa. His investment summit, meanwhile, has had the all-important job of drawing the public and private sectors towards each other after the relationship slowly deteriorated under corrupt former president Jacob Zuma, says leading economist Dr Azar Jammine. Assessing the details of the conference that attracted hundreds of delegates, Jammine emphasises that the key to turbocharging South African growth will be in working on long-term reforms to education, creating an environment in which entrepreneurship can flourish and improving government efficiency. None of this is rocket science or new information, however keynote speaker Jack Ma, a Chinese tech entrepreneur, used the three Es to create a typically Chinese mnemonic for this strategy. Jammine says following the three Es is essential if South Africa wants more than temporary improvements. – Jackie Cameron
By Dr Azar Jammine*
Cynics will argue we have heard it all before
It is commonly accepted that South Africa has been in a long-term economic decline since the beginning of the decade. Following early signs of newfound optimism at the beginning of the year in the wake of the election of Cyril Ramaphosa as new president, the optimistic business mood has given way to significant pessimism in recent times. It has therefore become a moot point as to whether or not the Jobs Summit held a fortnight ago and Friday’s Investment Summit represent initiatives that might restore some confidence and mark a turning point in the declining fortunes of the South African economy.
Leading South African economist Azar Jammine
Cynics might argue that such initiatives have been seen before and that they will lead to nothing. However, the intensity and magnitude of these two initiatives are geared towards ushering in a new element of hope and optimism for the economic future of the country.
First we had the Jobs Summit aiming towards the creation of 275,000 new jobs per annum over the next few years through a variety of 70 different targeted initiatives in agro-processing, mining, manufacturing, tourism and information technology.
Now we have the pledges made by a variety of both local and foreign companies to invest up to R290bn in a selection of investment projects identified in detail. They vary in scale, with the biggest being the intention of AngloGold Ashanti to invest up to R71.5bn in a variety of mining ventures and Vodacom intending to invest R50bn in cellular telephony. The two giant paper companies, Sappi and Mondi, have each pledged to invest around R7bn each in specific new plants in South Africa. The main automotive manufacturers, including Mercedes-Benz, BMW, Ford and Toyota have also joined the fray. There were slightly smaller investment commitments by companies involved in food processing such as Nestlé, pharmaceuticals such as Aspen, as well as by a few other IT businesses.
The structure of the summit was well thought out, with three breakaway panels involved in agriculture, mining and manufacturing; infrastructure, including water, energy and transport; and IT and business services and financial services. However, cynics will question whether this entails new greenfield investment or are simply plans that have been in place and whose implementation as projects was merely announced at the Summit because that was the appropriate forum in which to do so.
Optimists on the other hand will argue that some of these plans, even if they had been conceived already, may not have been put into effect had it not been for Ramaphosa’s charm initiative to ensure that these investment intentions do indeed see the light of day.
Magnitude of investment significant but not exceptionally dramatic
Setting aside the question of whether or not the R290bn worth of investment constitutes brand-new projects or not, one needs to put the order of magnitude of such cumulative investment into perspective. Overall capital formation in South Africa is currently running at around R920bn per annum. Seen in this vein, the R290bn worth of investment commitments is equal to approximately 30% of all capital investment.
Given that most of it is in the private sector, which accounts for around 70% of all capital investment, these commitments amount to more like 40% of annual private sector capital formation. The problem is that the R290bn of investment pledged probably refer to investment programmes that are likely to extend over several years.
Assuming that on average the R290bn is set to be spent over a five-year period, this implies that the average annual investment will amount to between R50bn and R60bn. Seen in this light, it represents around 5% to 6% of annual capital formation and a slightly higher percentage of around 7% to 8% of annual private sector capital formation.
This is substantial, but not massive. It will certainly provide some boost to capital investment but it should be borne in mind that with overall capital investment at just 19% of GDP, South Africa compares very unfavourably with other emerging markets where the ratio of fixed capital formation to GDP is 25% excluding China and 32% inclusive of China.
Recognising that capital formation provides long-term benefits in terms of enhancing the provision of goods and services in the economy, the manner in which South Africa has been lagging in terms of its capital formation is on its own one of the important reasons as to why the country’s economic growth has been flagging.
Interestingly, in its latest projections for the South African macro-economy, National Treasury had already forecast growth rates of 0.5%, 3% and 3.5% for fixed capital formation in 2018, 2019 and 2020 respectively. Bearing in mind that the Treasury’s forecast growth rates for overall GDP for these years are 1.1%, 1.5% and 1.9%, it does appear as if Treasury for one sees growth in capital investment accelerating beyond overall economic growth next year and the year thereafter even as it lags behind overall growth this year.
One wonders whether this projection was made deliberately taking into account possible benefits accruing from the Investment Summit. Some analysts have been inclined to add pledges made months ago by Saudi Arabia, Qatar and China of $10bn, $10bn and $14.5bn respectively. This implies a further $34.5bn (or R500bn) to the R290bn, or $20bn worth of investment pledges, preferring to talk about total pledges of $55bn (or R790bn).
The corollary to this is that Ramaphosa is already more than halfway towards his goal of attracting $100bn of investment over the next five years.
However, we would be wary of such optimism as we have struggled to get to the bottom of what kind of investment is implicit in these promises made by the three countries mentioned. Many suggest that these are merely loans which will carry interest rather than being true direct investment.
SA unduly dependent on portfolio investment rather than direct investment
It is important to distinguish between an initiative aimed at promoting direct investment such as the Investment Summit and the high quantum of portfolio investment that flows into South Africa and leaves its shores at a moment’s notice. Analysis of IMF data shows that more than three-quarters of all investment attracted to South Africa is in the form of portfolio investment, with direct investment contributing to less than 25%.
In most other emerging market countries, the ratios of portfolio investment to direct investment are the reverse, with a dominance of direct investment. The latter is preferable in the longer term because it increases the productive capacity of the economy and contributes towards higher employment levels.
With portfolio investment, on the other hand, whilst it may plug a gap in the short term with regard to helping to generate foreign exchange in the face of a large current account deficit, it does not contribute meaningfully towards the productive capability of an economy as avidly as does direct investment. Furthermore, high dependence on portfolio flows renders the country vulnerable to a reversal of these flows, with high currency volatility.
The latter is inimical to encouragement of solid investment planning that can help to generate increased direct investment and economic growth as a consequence. It is on these grounds that one should welcome the Investment Summit as an initiative aimed at increasing the ratio of direct investment to portfolio investment.
Biggest benefit is increased collaboration between private and public sectors
As cynical as one might want to be about the merits of the two summits, they did have one important goal in mind that seems to have been fulfilled. Ramaphosa clearly managed to get the buy in of the business community into the idea of these summits in a manner that has not really been seen in recent years.
Increasingly through the period of the Zuma regime, the private business sector came to be seen by the government as “the enemy” and efforts were made by politicians to convey such a message to the broader community, instigating increased antipathy towards employers by workers. The after-effects of this animosity are there still for all to see judging from the militancy of industrial action this year.
What the Ramaphosa regime’s initiatives by holding these Summits have tried to overcome is to kill off this notion of a huge divide between the interests of the private sector and the public sector. In a variety of industry-specific initiatives, Ramaphosa has tried to listen to business interests and in particular has been receptive to ideas put forward by business as to how a public sector whose efficiency has been deteriorating progressively in recent years, might stand to benefit by working together with private sector interests.
No way was he able to achieve this more readily on a more macro scale than in the Investment Summit.
Furthermore, the Summit attempted also to market South Africa’s investment possibilities to a foreign audience. This was a follow-up to the appointment of five high-profile “investment envoys” earlier this year to try and do his bidding in order to attract $100bn, or R1.4 trillion worth of investment over the next five years.
Marketing South Africa’s economy on a macro scale in this way does not appear to have much downside in its impact, only upside. The worst that can happen is that the funds spent on initiating such a marketing effort go wasted.
On the other hand, there could be a substantial boost to investment and through the multiplier effect thereof, to economic growth and employment creation themselves.
Attempt at reversing flagging business confidence
By all accounts the Investment Summit was highly successful as an event itself. To attract 1,300 delegates from both local and international sources and to organise such a giant jamboree in a successful manner, is no mean feat. It is almost like holding a mini World Cup successfully.
The big question of course will be to see whether the initiatives promised are implemented.
Even so, there can be no doubt that with both the Jobs Summit and the Investment Summit, President Ramaphosa has tried to uplift the general business mood which has been deteriorating so badly in recent times. The upbeat nature of the Summits seems to indicate that they have succeeded in instilling an element of renewed optimism that previously did not exist at all.
In the short term one is unlikely to see a major change in the course of economic growth purely on account of these Summits, but hopefully in the longer term they will elicit a slightly faster growth in capital investment than had previously been anticipated.
Jack Ma’s three E’s critical structural imperatives to concentrate upon to improve growth sustainably
Of course, one of the ironies of Friday’s Investment Summit was that the hugely positive mood at the Sandton Convention Centre contrasted with the negative mood for the Rand and the stock market. Both of these took a pounding and bond yields rose on the same day that all this commitment to large-scale investment was being made.
Part of the negative mood on financial markets was linked to the cellophane international stock markets more generally and the heightened risk aversion that this elicited. However, the Rand did depreciate by much more than other emerging market currencies. This was because Moody’s credit rating agency came out with a statement suggesting that it considered the Medium-Term Budget Policy Statement (MTBPS) tabled on Wednesday as “credit negative”.
This was not altogether surprising bearing in mind the manner in which the MTBPS surprised analysts with an overshoot of projected budget deficits and public debt to GDP ratios. However, this merely served to illustrate the manner in which South Africa’s fiscal parameters have been declining and are expected to continue to do so in the absence of appropriate structural reforms, including those related to government efficiency.
Jack Ma, chairman of Alibaba Group Holding Ltd., speaks during a Bloomberg Television interview at the company’s headquarters in Hangzhou, China. Photographer: Qilai Shen/Bloomberg
In other words, investment commitments alone are insufficient to generate confidence regarding a potential turnaround in South Africa’s economic fortunes from a longer term point of view. In this regard, it was gratifying to note the highlight of the Investment Summit being the interview with Jack Ma, founder and owner of Chinese Internet commerce giant Alibaba.
It was a riveting interview, culminating in Ma emphasising the imperative of concentrating on the three E’s as he called them, viz. Education, Entrepreneurship and Efficient government. These go to the heart of the structural weaknesses inherent in the South African economy in the presence of which economic growth will still not reach its full potential even in the presence of increased capital investment.
Without appropriate education and skills development, investment initiatives are likely to have short-term benefits rather than longer term ones and are unlikely to generate as much employment as they are capable of doing because the productivity and innovation that might stem from them will not be forthcoming.
Secondly, unless the South African economy is transformed in such a way as to break the concentration of power in the hands of big business, organised labour and government in such a way as to unleash the latent entrepreneurial talent and small business activity in South Africa, again the country will not be able to fulfil its two growth potential.
Finally, unless governance procedures within government are properly addressed and corruption and state capture rooted out and the civil service rendered more competent and efficient, no matter what the private sector tries to achieve, it is likely to fail to some extent simply because of the drag of government.
In conclusion, one may well welcome many positive aspects of the Investment Summit and the exercise does appear to have been worthwhile. However, unless Ma’s three E’s are addressed in their broadest terms, there will only be a temporary boost to growth from increased investment. Inroads that need to be made into attacking poverty, inequality and unemployment will be suboptimal.
29 October 2018 – Biznews