Cyril’s Sona presents a poser for investors and GDP forecasters
While Ramaphosa made all the right noises, scepticism about growth and the ability to turn it linger
When exactly do you start pencilling “intention” into a GDP forecast and into asset prices?
This is a question that will plague analysts and modellers as well as investors in the coming year after last week’s State of the National address (Sona).
After the ANC’s conference at Nasrec and 2018’s Sona, GDP forecasts were upgraded by around a percentage point on the back of expectations of a different way of doing things and Ramaphoria leading to improved investment and growth. That turned out to be very much premature.
Investors learnt that intent and even actual, real strong positive sentiment are insufficient in the face of severe binding constraints on growth, as well as the fact such changes can take considerable time. GDP forecasts for 2018 were therefore revised back down during the year despite so many summits and announcements.
As such, scepticism about growth and the ability to turn it has set in and was evident from business leaders I met on a recent two weeks in SA.
Some of this is justified given the complex and heavily interwoven nature of the binding constraints on growth mean that many things need to be got right first. However, we need to be constantly on guard to not make the same mistake in the opposite direction and keep growth forecasts too low for too long.
Beyond the specific narratives of Sona it was clear that the Ramaphosa government now has an ability to crowdsource various, specific ideas into a speech and then into a programme for government. The December and January colloquia as well as the Public Private Growth Initiative (PPGI) seem to have had a strong impact in this regard. Indeed, one of the most radical and positive set of proposals in the Sona related to early childhood development and child literacy were lifted from the contributions of Nic Spaull from Stellenbosch University during the colloquia process.
Investors and forecasts are left then with a hard choice after Sona 2019. Do you give the benefit of the doubt on what was announced? If you do, how are you going to shift your forecast? What elements of the Sona equate to how much on the GDP forecast for 2019, 2020 or 2021? Does a reference to increasing the focus on export-led growth lead to a percentage point or half a percentage point on growth in the coming year?
These are important questions for the SA Resrve Bank and national treasury too – both setting policy off these forecasts in the coming months.
There are simply too many imponderables, especially before the election. For me, the strong commitments and intent of the Sona on growth policy adds moderate upside risks to growth in the medium run, but the chance of realisation of those positives is still uncertain. I think many FDI and portfolio investors come to the same conclusion.
As Stuart Theobald laid out here in November, companies at a micro level need higher returns and lower risks in order to get investment growth at a macro level moving. The intent shown in the Sona has the potential to start to reduce future risk for investors, at the margin, but needs to be followed through with action and then momentum to bust through scepticism and properly adjust investor perceptions of risk reward.
This is going to be hard.
Recent announcements by Total of hydrocarbon reserves discovery off Mossel Bay are risky if they distract from the hard work needed to shift the underlying doing business environment and so improve the risk-reward for domestic and foreign investors. SA needs to be cautious of not falling into a Dutch disease trap – and in any case such hydrocarbon support for the economy is itself uncertain, risky and likely realised only in the longer term.
In the interim, the Sona identified a new way of thinking, in one specific announcement. While the speech was full of “more of the same” in terms of sectoral focus and directed central government control on economic policy, the targeting of SA to move from 82 to within 50 on the World Bank Ease of Doing Business ranking is, for me, highly significant. The reason is that the Doing Business rankings, for all their faults and simplifications, are one headline number that is comparable across countries. It is easy to track and is independently, externally produced.
To jump so many places in three years is a huge ask, but certainly not impossible.
More importantly, the make-up of the rankings is specific and detailed, targeting the actual factors that impede or facilitate business in start-up and expansion. The rankings look at 10 sub-indices: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. I find it all the more interesting that these sub-indices are generally facilitators of SMME creation and growth in particular, as well as proxies for the ease with which informal-sector enterprises are formalised.
The World Bank provides specific and detailed feedback on the rankings every year, which is a template for the government, and others such as the Organisation for Economic Co-operation and Development are also doing work on blockages in the economy at a micro level.
The Sona promise to provide a regular feedback mechanism to the cabinet means there will now be no excuse for inaction. SA will be joining a host of other countries across EM – most notably over history, Egypt, Vietnam, Poland and Nigeria and India more recently. It’s a competitive game but one that investors like to latch onto, given the ease of monitoring.
Most importantly in SA, just as with the Eskom-induced “panic” creating a mindset change to necessary fundamental reform, so targeting the Doing Business rankings can create a focused mindset for change and emergent growth within cabinet and the government by getting the foundational basics right. As implementation starts (and is evidenced), scepticism will fall away and then growth forecasts can rise in the medium run.