Economic Watch

With recession clouds gathering, has NDP become redundant?

Frans Cronje

As recession clouds are getting darker over the South African economy, with worsening unemployment statistics and market forces having effectively already downgraded the country’s credit worthiness, it seems that the National Development Plan (NDP) is in serious need of a rethink.

This is effectively the conclusion of a National Growth Strategy (NGS) launched last week by the Institute of Race Relations (IRR).

It coincided with advisory firm Deloitte’s publishing its South African Restructuring Outlook Survey 2016 and concluding: “Political uncertainty, high unemployment rates, slow economic growth and severe drought have created a perfect storm of economic and political events for South Africa.”

The survey revealed that close to 39.4% of business restructuring experts expected a recessionary economy, driven by political uncertainty and corruption, concerns around global economic health and poor commodity prices.

On the domestic front the Manufacturing Circle’s 2016 first quarter manufacturing survey, also released last week, showed a deterioration in sentiment over the past quarter, with 57 manufacturing enterprises highlighting the pressures faced with stocks piling up, a decline in sales and rising debt amid escalating costs.

Presenting the findings of the report, Nascence Research and Advisory chief economist Xhanti Payi, said the “general sense” from the survey was that operating conditions during the period had “tightened” and the South African manufacturing sector was “taking a lot of strain”. “In the last three months, we have seen negative growth,” he noted.

A week earlier it was also reported that recession fears were mounting after figures released by Statistics South Africa revealed that mining output plunged by 18% - the most on record - figures from Statistics South Africa showed on Thursday.

Global news

On the economic front global news were also not very encouraging.

The Sovereign Investor website reported that several noted economists and distinguished investors, with reference to Wall Street, are warning of a 50% stock market crash:

“Billionaire Carl Icahn, for example, recently threw up a red flag on national broadcast when he declared, ‘The public is walking into a trap again as they did in 2007’.”

Unfortunately, Icahn’s warning is tame compared to his peers.

Andrew Smithers, the chairman of Smithers & Co, was more forthright and said: “U.S. stocks are now about 80% overvalued.” He backed up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.

Even the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis. They told their clients to “Sell Everything” because “in a crowded hall, the exit doors are small”.

IRR’s plan

It is against this background that the IRR launched its NGS, as an “economic recovery plan” drafted by its policy team.

It seeks to:

  • Improve capital inflows and foreign direct investment (FDI) into South Africa, so as to start raising the growth rate;
  • Build and maintain essential economic and social infrastructure to stimulate growth and provide a solid foundation for further entrepreneur-driven economic expansion;
  • Translate increased growth into increased employment; and
  • Help the disadvantaged climb the economic ladder to increased prosperity, while sustaining current social protection.

To get the growth rate up, the IRR maintains that South Africa needs to push up the ratio of fixed investment to GDP from 20% to 30%. To achieve this, it will have to attract significant amounts of both foreign and domestic capital.

Towards this end it proposes, among other things:

  • Reworking the Protection of Investment Act of 2015 to increase the protection on offer to foreign investors, in particular;
  • Entering into new bilateral investment treaties with major trading and investment partners, based on the SADC Protocol on Finance and Investment of 2006, which was ratified by South Africa in 2008;
  • Bringing the Expropriation Bill into line with the Constitution under a revised bill similar to that put forward by the IRR;
  • Abandoning proposed ceilings on farm sizes and a bill seeking to vest all non-urban land in the custodianship of the state; and
  • Securing intellectual property rights, including copyright and patent rights, by scrapping the proposed intellectual property tribunal and related policy proposals.

Taking these steps, the IRR argues, will send a clear signal that the government is serious about policy reform and attracting the fixed investment needed to drive growth and jobs.

This, on its own, may be sufficient to prevent the country being downgraded to junk status by international ratings agencies.

The IRR also puts forward proposals to:

  • Improve domestic competitiveness;
  • Increase capital investment accompanied by the growth of new small and medium enterprises (SMEs). Future job creation will generally take place, not through large corporations employing great numbers of people, but rather through a plethora of SMEs seeking to supply a vast range of goods and services to both domestic and external markets. Profit-seeking, risk-taking entrepreneurship is the key to faster growth and millions more jobs. It thus needs to be recognised and valued for its important contribution to the prosperity and well-being of all South Africans;
  • Create enabling climate for entrepreneurship and business start-ups;
  • Liberalise the employment; and
  • Scrap the Black Economic Empowerment  (BEE) programme and replace it with an Economic Empowerment for the Disadvantaged [EED], vouchers, welfare system

Implementation of the NGS will need a fundamental rethink of the present NDP. Frans Cronje, head of the IRR and the task team that formulated the NGS, said at its launch:

“It is not for the IRR to dictate to the government or political parties what to do. Too many groups overstep that mark and think they should decide on policy or try to push for changes through the courts. Think-tanks such as the IRR can help to act as catalysts for change, but only the government has a mandate to take policy decisions on behalf of large numbers of people. Our role is thus to develop simple, workable, policy alternatives and show the benefits of these.

“At the same time, if South Africa continues on its current economic trajectory, the ruling party could lose power before the end of the decade. As people become poorer and lose hope, they also lose their earlier confidence in the ANC, as various opinion surveys now show. The ruling party would thus be wise to acknowledge that many of its current policies, including its transformation ones, are at odds with the urgent need for investment, growth, and jobs.

“South Africa is now in considerable economic trouble. Looming ratings downgrades to sub-investment levels will worsen our economic position and make it much more difficult to stage a recovery after the 2019 general election.

“At the same time, the government is still capable of reform. In the period from 1994 to 2007, it did much to raise the growth rate and lower debt levels, while simultaneously expanding social protection and improving living standards. The National Growth Strategy is thus within the power of the government to start implementing very soon – and then to drive forward to highly successful outcomes.

“Many other growth plans have, of course, been drafted for and by the government. Often they are too vague, complex, and impractical. Sometimes their time frames are so long that they seem irrelevant. Others seek instant fixes and thus rely on gimmicks such as ‘wage subsidies’ and ‘industrial development zones’, which ignore the structural reasons for poor economic performance. Yet others have focused on ‘low hanging fruit’ to the detriment of needed structural reforms.

“The National Growth Strategy avoids these pitfalls. If the bulk of the National Growth Strategy is adopted and implemented, this will stave off looming downgrades to junk status. The strategy will also have a measurable impact on investment, growth, employment, and income levels, within 12 months. At the same time, it will provide the foundation for sustainable growth rates of 7% of GDP within a decade. This will allow South Africa to combat unemployment, poverty, and inequality; live up to its great potential; and emerge as a prosperous middle-income economy by the 2030s.

“Many in the government may be ideologically reluctant to embrace these reforms. “However, much of what we propose is drawn from the successes achieved by Lee Kuan Yew in Singapore in the 1950s and 1960s, which in turn helped inspire the reforms driven by Deng Xiaping in China in the 1970s and 1980s. Both these men were nationalist leaders who dramatically changed the fortunes of their countries and turned them into influential global economic powerhouses. Their extraordinary successes show how much can be achieved – and should put paid to any notion that South Africa cannot also become rich and influential.”

by Piet Coetzer

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