Business confidence has rarely been at high levels in SA, but since about 2010—bar a few short periods—has been in the doldrums.
But in the last few months, it has taken a serious hit and has yet to emerge from this.
In the second quarter of this year, the Rand Merchant Bank (RMB) and Bureau for Economic Research (BER) Business Confidence Index (BCI) underwent a precipitous eight-point decline from a recent high of 47. And in the latest reading for the third quarter of this year, released last week, this dropped by a further one point to 38. That means that 62 percent of the businesses surveyed are pessimistic about the future.
A reading of 50 percent means that businesses are neither pessimistic nor optimistic. The long-term average of the index is 40 percent, showing that on the whole, businesses have been pessimistic about the outlook.
In recent months, war in the Middle East driving up the oil price, higher interest rates, and the hit to consumer confidence have all pushed the index lower. Also depressing confidence has been the uncertainty over the outcomes to the municipal election.
All the while, our messy politics and the fears it generates play heavily in the background.
Confidence in a country means that people trust that political stability, sound government, and growth and opportunities will result in improvements for themselves and their families. If they are in business, that means they can start thinking about expansion. Deep confidence in a country means that you are prepared to invest for the very long term.
The breaking of confidence in post-apartheid South Africa coincided with and was largely due to the Great Financial Crisis and President Jacob Zuma coming to power.
The politics of the ANC mean economic reform is limited to Operation Vulindlela, the necessary but limited measures President Cyril Ramaphosa is prepared to take. This will not allow the country to present a fresh growth story to investors of the sort that can spark big interest.
The ANC has largely lost the trust and confidence of the voters and business. And we are paying the price with low levels of confidence and a growth rate this year that could be under one percent.
Apartheid may have benefited investors, but it always brought enhanced risk of a popular uprising. There were high levels of business confidence in the aftermath of the 1994 settlement, but this quickly dissipated due to the spate of emerging market financial crises.
From the early 2000s, business confidence recovered due to greatly improved government finances, which culminated in a small surplus in 2008. But then, with the Global Financial Crisis and President Jacob Zuma coming to power in 2009, confidence collapsed. It has never fully recovered to the levels of the late noughties.
The importance of business confidence indices is that they are reliable leading indicators of the direction of the economy and turning points in business cycles. When confidence rises, local and foreign businesses take up more investment opportunities. It sets off a virtuous circle, which we have not seen in this country for some time.
There is a clear break in the performance of the Index between the period 1994 to 2010 and that from 2010 onwards. The average reading of the BCI between 1994 and 2010, two years after the Global Financial Crisis and short of a year after Zuma came to power, averaged 44.5 percent. From 2010 to its latest reading, it has averaged 33.6 percent. This is a substantial difference and shows a serious break in business confidence.
Since the steep drop in the index last quarter, there has not been sufficient good news to pull it out of its downturn.
“Business confidence has stabilised, but at a level that remains too low to support the stronger investment and employment growth SA needs,” says the Chief Economist at RMB, Isaah Mhlanga. Improvement in the index requires better demand in the economy, continued progress in reform, and greater certainty in the future of local government.
That is a big call.
In her weekly newsletter that came out on Monday, the CEO of Business Leadership South Africa, the body that represents the country’s largest corporations, said that reform is moving ahead, “but business confidence is behind.”
The problem, she wrote, is that reform has not yet resulted in real improvements in the operating environment. But steps to ensure a more competitive environment and greater efficiency are underway, she assured her readers.
One example of reforms that would have an impact in time, she wrote, is the recent call for submissions by advisors for the unbundling of Eskom’s transmission assets into an independent operator. This, she said, is a step towards the creation of a competitive electricity market. And then there was, she wrote, good news on progress on the government’s rail network statement, which would set out how private operators can access the national rail network. That’s key to improving logistics and unlocking billions in new investment in rail.
These point to important changes that will allow greater competition and efficiency in the power and rail sectors. But there are many gaps in the reform agenda. There is absolutely no plan to fully privatise SA’s big state-owned monopolies, which serve to undermine productivity and growth. Over and again, the International Monetary Fund has pointed out that productivity, a key driver of growth, is undermined by the state enterprises.
Even with these changes and allowing for more private power producers and rail services, we will fall short of the full potential that reform could bring about.
Considering its record, it would be risky to allow Eskom to invest in the next generation of power stations.
Nothing exists anywhere in the world like Transnet, which brings together rail, pipelines, ports, and multiple other assets. It is poorly managed, and there is no reason for all its assets to be held by the state. Contracting out services to the private sector is positive, but we could gain a lot more if the next step—full privatisation—is taken.
In the meantime, the ANC is intent on tightening the labour laws and doubling down on empowerment restrictions for ownership and employment. The government speaks of reform because it knows that is what much of the world outside the ANC wants to hear. But politically, it does not have the support within the party to fully deliver on reform.
To build confidence, a strong commitment to the rule of law is required. The Madlanga Commission just might be a strong start.
The ANC gains much of its support as a result of patronage, which can mean jobs and contracts handed out by state enterprises. That is why deep reform will not fly and why confidence is in the doldrums.
[Image: Sandton]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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