For foreign investment to grow in South Africa, political leaders must learn to be careful about what they say
Reg Rumney
The South African economy enters the new year with a lot to prove. The growth rate for 2000, which has been steadily revised downwards, is now expected to come in at 3% way off what we need to tackle mushrooming unemployment. Direct investment by foreign companies has slowed to a trickle. The rand has been clubbed into the ranks of the world’s basket-case currencies. And investors’ perceptions of stability in Southern Africa have been shattered by the political crisis in Zimbabwe.
At the end of 1999, the future looked considerable rosier. BusinessMap concluded that the economy was “poised to perform”. Indeed, BusinessMap’s 1999 South Africa Performance Rating predicted the upgrading of South Africa’s credit rating that transpired earlier this year a crucial endorsement of the African National Congress government’s commitment to investor-friendly economic policies.
The upgrade was based on good fiscal management, including low debt, healthy growth prospects, independent monetary policy and a smooth political transition.
But as 2000 unfolded, the benefits associated with an improved credit rating have failed to materialise. Business and consumer confidence have both taken a drubbing, and the performance of bonds and local shares on the Johannesburg Stock Exchange securities exchange has been poor.
Foreign direct investment, the lack of which remains the Achilles’ heel of the country’s economic recovery, withered again this year. BusinessMap’s foreign direct investment figures for 2000 have reflected some of the poorest performances recorded over the past few years.
What went wrong and how can the same mistakes be avoided in the coming year?
BusinessMap’s most recent Country Risk Rating (which has replaced the Performance Rating) points to some answers. It highlights the interplay of politics and economics, and how political leadership is vital in overcoming structural economic problems such as joblessness, income inequality and skewed access to opportunities. These threaten to undermine the government’s so-far outstanding efforts at prudent fiscal management.
Some of the blame for the country’s economic problems can be put on external factors such as the strong dollar and the surging oil price, which translated into higher inflation. Other problems were definitely of our own making.
For a start, we need look no further than President Thabo Mbeki’s defensive and confrontational political style, which has aggravated investor pessimism. As the year comes to a close, there appears to be a drive within the presidency to put this right, and to seek better relations with business in particular.
The government has tried to rebuild a relationship with business. That said, the International Investment Council looks like an opportunity lost. The council has had only one substantive meeting this year, with no evidence of its impact or intervention as negative perceptions took root during the year.
Particularly damaging to business confidence has been the president’s controversial stance on Aids, as has his conciliatory approach to Zanu-PF during the turmoil in neighbouring Zimbabwe. Mbeki’s questioning of the link between HIV and Aids as well as his flirtation with Aids dissidents has seriously undermined his standing in both local and foreign business circles.
Worryingly, the markets have shown a tendency to react more sharply to bad news than to good. The Risk Rating report, therefore, concludes that for the government the biggest policy challenge remains managing perceptions, although there are serious underlying problems, such as high crime levels, that also need attention. The criminal justice system was one area in which the political leadership was long on promises but short on delivery this year.
The government has shown it is aware of the need to do something about perceptions: it will start next year with a serious international marketing drive. A tender was put out at the beginning of the month for a multimedia international marketing campaign for South Africa. For such a drive to work, political leaders must learn from the past year to be more careful about what they say in public, and not shoot themselves and the country in the foot.
The government also has to have something to market. The Department of Trade and Industry is expected soon to announce new incentives to attract underwhelmed investors. This is particularly pressing in what seems to be a policy vacuum, with the apparent discarding of the so-called “spatial development initiatives”.
BusinessMap believes the investment environment also needs a comprehensive review. Incentives alone are not enough.
The hope is that foreign investment will create the many more jobs the country desperately needs jobs not only in the bare subsistence that the informal sector tends to offer if South Africa is to achieve a sustainable growth rate.
Skills must be beefed up if economic growth is ever to clear the 3,5% hurdle. The report notes that human capital development is increasingly important in light of alarmingly high HIV/Aids infection rates.
Skills are scarce not only in the private, but also in the public sector. State restructuring will accelerate next year, starting with the initial public offering of shares in Telkom. This will not only please the market, boost foreign investment and bring in foreign exchange, but could also address the capacity problem at senior levels.
The government’s service delivery has so far been patchy. It will be hard-pressed to meet expectations, especially those raised by the promise in the ANC local government manifesto of free basic services. The complex and far-reaching changes to local government now coming into effect, with unicities and reduced number of municipal areas, still have to be put to bed.
Despite overall disappointment, the year ends with encouraging signs: Mbeki has announced his withdrawal from the Aids debate, which suggests that he is aware of how damaging his involvement had become.
Respected black businessman Wiseman Nkuhlu, his newly appointed economic adviser, will be likely to want to move Mbeki away from controversial issues towards a style of engagement that builds the kind of relationships that will increase business confidence and economic growth.
Also, Mbeki is in regular contact with Zimbabwean opposition leader Morgan Tsvangirai, who is now building his access and support among the governments of the region.
While racial polarisation reared its head, there are generally high levels of political tolerance in South Africa.
Nonetheless, government needs in the coming year to adopt a more open political style, sustain democratic checks and balances, beef up its fight against corruption, consolidate the new local government structure, and allow active political opposition and debate.
If it does not, we may end up looking back with some nostalgia at 2000.