South Africa has run out of options

South Africa’s only option left out of its economic decline is to deregulate sectors of the economy to encourage private sector investment. 

In particular, sectors long dominated by public companies should be opened up to private competition to encourage investment in infrastructure. 

This is largely a result of the financial collapse of the government and state-owned enterprises (SOEs), making them incapable of investing heavily in infrastructure projects.

However, this does not mean that the state should not play a substantial role in the local economy, with it being crucial to crowd-in private investment and create an enabling environment for companies to grow. 

The state also cannot be replaced by the private sector in many cases. Rather, it simply can no longer be expansionary due to its financial deterioration. 

This is feedback from Stanlib chief economist Kevin Lings, who outlined what the government needs to do to encourage private investment in the economy. 

Lings explained that private companies are currently holding over R1 trillion in cash, as business confidence has been extremely low in South Africa over the past decade. 

The minimal investment corporates do engage in is largely in the form of subsistence investing to keep their doors open and not to expand. 

“We would have to up the investment considerably more to result in capacity building or job creation in South Africa,” Lings said. 

“The current investment level is mainly maintenance capex and kind of treading water, with companies waiting for a better environment.” 

“Instead of deploying capital into growth or hiring, corporates are parking it in money market funds or call accounts.”

This capital is desperately needed in South Africa to help build and maintain infrastructure vital to the proper functioning of a modern economy. 

To get this capital off the sidelines and invested in the economy, the government has to create an enabling environment for companies. This begins with deregulation. 

“I would say that deregulation is your only option now. It is your only choice, and while you may not like it ideologically, it is your only option,” Lings said. 

“You are out of options, and those options have been taken away because you took government debt from 26% to 76% of GDP. That increase meant you have taken away your option to use your own balance sheet.” 

Lings said it would have been ideal for South Africa for the government to use its own balance sheet for infrastructure investment. However, this option is no longer available. 

Getting the private sector on board

For the private sector to increase its investment in South Africa, the government needs to deregulate some sectors and create an enabling environment for business growth. 

This will all translate into enhanced confidence, encouraging private companies to get some of their cash off the sidelines and into the economy. 

For Lings, this is a far better outcome than turning to international lenders like the World Bank or the International Monetary Fund. 

“Your only options are international agencies. Or, talk to the local private sector and ask them under what conditions they would begin to invest in local industry,” Lings said.

“That is happening. That discussion is happening, and it turns out that companies and asset managers are interested.” 

There is strong demand from asset managers, particularly retirement and pension fund administrators, to invest in these kinds of assets, such as infrastructure. 

“But, they want to know that these pieces of infrastructure are financially viable and that they will get a return on investment for retirees,” Lings said. 

“I am saying do that with a high degree of urgency, and then you will start to unlock that element of the economy.” 

Once this is done, business confidence will rise significantly and investment will naturally flow into these kinds of projects and South Africa more broadly. 

“As companies see infrastructure being developed, their investment will increase and will naturally unlock their own balance. They are not going to naturally just do it one day,” Lings said.

“We are now at the point where we are out of options except for public-private partnerships.”

These partnerships draw in some of this cash and some of the investments and get the process going. Crucially, this can ignite economic growth.

“Once you start to get some investment, then you tend to get a virtuous cycle where others are willing to follow, and that begins to unlock substantial capex,” Lings said. 

“The initiation of the process is the most important thing. Once you start investing, lift the growth rate, then there is a tendency for it to become self-reinforcing.”