South Africa’s forgotten crisis worse than load-shedding

South Africa is suffering from a 15-year-long confidence crisis, with business confidence only being in positive territory twice in that period. 

This is indicative of the ongoing confidence crisis in South Africa, which has significantly impacted economic growth over the past decade. 

Without confidence that the local economy will grow, policies and regulations will remain stable, and there will be a return on investment, investors are unlikely to allocate capital towards the local economy. 

South Africa’s political climate has been the biggest handbrake on the local economy since 2008, preventing businesses from investing in the country. 

In the late 2000s, things changed significantly in South Africa, with Jacob Zuma ascending to the presidency and beginning to make appointments to key positions based on personal preference rather than merit. 

During this period, Old Mutual chief economist Johann Els explained that concerns began to grow about South Africa’s policy direction and trust in the individuals running the country began to decline. 

As these concerns grew, investment in the country dried up, and economic growth collapsed. This was coupled with a rapid increase in government spending, resulting in the state’s debt load soaring, further eroding confidence. 

South Africa’s strong GDP growth during the Mbeki era stopped almost instantly, and the country’s debt rapidly increased.

Els said studies from economic institutions indicate that the declining confidence in South Africa has cost it one percentage point of economic growth per annum over the past decade. 

This means that if confidence remained at the levels seen under Mbeki, the local economy would have grown by over 2% per annum over the past decade instead of 1%.

The graph below, courtesy of Stanlib chief economist Kevin Lings, shows the poor business confidence in South Africa since 2008. 

The Bureau of Economic Research’s (BER) business confidence index takes the percentage of respondents that rates prevailing conditions as satisfactory as indicator or proxy of business confidence.

Business confidence can vary between 0 and 100, where 0 indicates an extreme lack of confidence, 50 neutrality and 100 extreme confidence.

South Africa’s political climate

South Africa’s political climate, particularly policy uncertainty, has been the biggest handbrake on the country’s economic growth. 

Policy uncertainty prevents businesses from investing to grow and increases the country’s risk premium, making capital more expensive, Standard Bank chief economist Goolam Ballim explained earlier this year. 

Many analysts point to Eskom’s troubles over the past decade, Transnet’s inefficiencies, and elevated interest rates as the reasons for South Africa’s poor economic performance since the late 2000s. 

However, Ballim said these issues are primarily symptoms of a political climate constraining the local economy and preventing solutions to these problems from being implemented. 

Standard Bank’s research indicates that the political climate is the number one reason businesses hesitate to invest in the local economy. 

Ballim explained that over the past decade, company investments have largely been ‘subsistence investing’—capital allocated to keep the business running. 

This is far from capital that is being invested to grow operations, employ more people, and generate more revenue. 

It is characterised by large sums invested in alternative energy sources, backup water systems, and increased security to keep the business open.

Policy uncertainty has dominated South Africa’s political climate over the past 15 years, with businesses consistently ranking it as the number one constraint on their growth. 

Uncertainty results in businesses being hesitant to invest in South Africa and contributes to the country’s elevated risk premium. 

This, in turn, makes it harder for South African companies and the government to raise capital to fund investment. 

South Africa’s political climate has steadily deteriorated since 2008, when an environment conducive to private sector investment translated into strong economic growth and the government running consistent budget surpluses. 

The graph below, courtesy of Ballim, shows the improvement in the political environment in the first decade of democracy and its decline since then.