Opinion: We Should Not Underestimate The Pressure That Political Constraints Place On The Private Sector And South Africa’s Economy

A juxtaposition of the results of the 2021 Q4 Business Confidence Index (BCI) by the Bureau for Economic Research (BER) and RMB, and South Africa’s recent political crises, shows a clear correlation between business confidence and the political climate. These findings can be corroborated by taking a glance at South African history, which paints a clear picture of the interplay between politics and economics. As the Index illustrates, amongst a list of constraints on the business environment, respondents in the manufacturing industry consistently rate the general political climate as one of the biggest barriers.

This is according to Hugo Pienaar, Chief Economist at the BER and the latest guest on the Think Big series of webinars, hosted by award-winning journalist, Bruce Whitfield and leading PSG executives.

As part of a dialogue around the future of South Africa’s economic landscape, Whitfield turned to the Index and enquired about how “political constraint” is measured. Pienaar answered by way of example: “As part of our survey, we asked senior executives in manufacturing firms to rank the severity of a number of constraints, among them being the ‘general political climate.’ Under this category, respondents most likely placed aspects like the regulatory burden on business, labour issues, uncertainties around policy and the recent spate of looting that broke out across the country. What became clear from the results was that business will never be ‘good business’ without the state working single-mindedly towards the goal of shaping an environment that is conducive to confidence that will ultimately drives higher levels of fixed investment.”

South Africa seems well on its way to economic recovery, but unless we can sustainably replicate a higher level of Gross Domestic Product (GDP) growth, the public finances will continue to deteriorate. The most obvious solution would seem to be cutting expenditure, but Pienaar believes that, in the absence of faster real GDP growth, this is not sufficient to reverse the rising public debt trajectory.

As Pienaar elaborates: “If we look at the fiscal arithmetic, the current cost of our debt is higher than our rate of growth. What we need in very basic terms, is for our growth rate to equal or preferably exceed our debt servicing costs. Of course, this is ‘easier said than done,’ but it should be the state’s goal. If we can stimulate our growth rate and increase our revenue base while cutting back on less productive spending, we have a fighting chance.”

On the topic of economic reform, Pienaar referenced the Public Finance Management Act, explaining that several procurement regulations were tightened in the wake of state capture, but this has led to unintended consequences for business. The regulatory burden and level of bureaucracy is prohibitive, and plausibly one of the reasons why private sector power generation hasn’t been able to take off as quickly as the country needed it to.

“The high cost of doing business in South Africa is having several adverse consequences, including on private sector jobs and fixed investment. Fortunately, civil society has stepped up to the plate in many ways, playing an active role in contributing to change in service delivery, but what we need to sustain these efforts is a more efficient interplay between a capable state, civil society and a supportive private sector who will be compelled to act when they see the effects of economic reform,” Pienaar explained.

Pienaar began his career as an economic reporter for Cape Town based newspaper, Die Burger, during which he was nominated as one of the Best Industry Newcomers in the prestigious Sanlam Journalist of the Year Awards. In 2003, Pienaar left the media space to help establish an economic consultancy firm and would later join BER as an economist in 2006. He has been BER Chief Economist since 2019. Today, Pienaar is the author of the Bureau’s flagship Economic Outlook publication and, along with a capable team of economists, is responsible for its macro forecasts.

As Dan Hugo, Chief Executive: PSG Distribution concluded, “the state of the economy and its future cannot be divorced from the political environment by which it is surrounded. With 325 parties jockeying for a position in parliament and feverishly forming coalitions to govern the country’s various municipalities, South Africa faces unprecedented challenges of a macroeconomic nature, which ultimately play out in the microeconomic spectrum. As PSG, we would like to thank Hugo for his insightful talk – we are confident that civil society and business; armed with this knowledge, will be better equipped to charter a way forward.”

BER Chief Economist, Hugo Pienaar explores economic recovery and reform in the latest Think Big webinar by PSG