South Africa has had a lackluster GDP growth rate for the last few years, hardly ever beating 1% on an annualized basis. The quarterly figures were spread from slightly negative to hardly positive. Disappointing growth rates are the norm. But when the most recent GDP growth rates were released, it sent shiver down the spine of the most hardened pessimists. It came in at -3.4%.
The primary sector fared particularly bad, with agriculture recording negative growth of -13.2% and mining at -10.8%. Manufacturing did not much better at -8.8%. For each one there were reasonable explanations why such a poor result is was recorded. Agriculture slumped because of the substantial growth in the last quarter (7.9%), mining and manufacturing were impacted by the power cuts Eskom had implemented, just to keep SA’s electricity grid from collapsing.
All these excuses miss a very important point. South Africa simply failed to attract enough investments. Local businesses are coy to invest given the mediocre prospects; international investors have a whole host of reasons. We however need them to fund new factories, to finance expansion of existing mines and to build new ones. The government can’t drag the economy out of the hole by themselves since they don’t have the finance to do so. They have too much debt curtesy of Eskom already. But instead of attracting more businesses to expand their local footprint, we are losing them. AngloGold for example, a gold mining company that in the past might have been described as a national champion decided to sell their last gold mine in South Africa. In fact, South Africa portion of the total foreign direct investment into Africa has shrunk. That means that investors are increasingly more willing to commit capital to countries like Kenya, Ethiopia and Morocco at the expense of South Africa.
Investors will be drawn naturally to environments where three factors are prevalent: the ability to generate a descend return on their capital, stable government with policy certainty, and an operating environment which is welcoming and not hostile. We have none of that. Returns have been poor. Many of the more recent projects of listed companies have a cost of capital that is higher than the return on it. The primary and secondary sectors are burdened with very high electricity prices and increasingly expensive labor. Policy goalposts keep on changing. One need to look no further than BEE accreditation, especially in the capital-intensive mining sector (who really need a long-term policy certainty). Land reform blurred the line of whether land should be classified as an asset or liability. The operating environment is no better either. The Unions are militant and can be very violent and disruptive even if they only represent a minority of the total work force. Visas for skilled foreigners are hard to get and much of the workforce is under-qualified thanks to the dismal education system they had to endure.
So what to do?
Extremely high unemployment, a poorly educated workforce and a stuttering economy dictates that South Africa needs to attract more foreign capital into their primary and some secondary sectors. That means we need to expand the mining industry, which would suit us well since we have some of the richest resource deposits. Land ownership must be guaranteed by the government, and unions should not be forced upon workforces. Collective bargaining needs to stop. There should be Tax incentives for private individuals setting up new businesses, and red tape should be cut to a bare minimum. If need be, foreign professionals should be granted work visas quickly, as they can contribute not only to the growth of the economy, but also by sharing skills with locals.
The South African governments priority should be to make it as attractive as possible to foreign direct investments. Without foreign capital flooding in, South Africa will have to rely on our own pool of capital, that is both finite and scarce. It is now a time where Ramaphosa need to be bold and make it very clear – we want investments and that is our priority.