I have attached a very interesting article by Nazmeera Moola, Economist and Strategist from Investec Asset Management, sent out by Discovery Invest. Gross Domestic Product is only expected to achieve 1.5% this year and has been on average 1.9% since 2009. Unfortunately a low GDP does not bode well for business; National Treasury; the unemployed and the strength of the Rand. Read the article and let me know your thoughts.
Bureaucracy is strangling SA growth
September 2014
Nazmeera Moola
Economist and Strategist – Investec Asset Management
We’ve all heard the semi-good news: South Africa’s economy did not slip into a recession in the second quarter.Instead it avoided two quarters of consecutive contraction by growing output by a mediocre 0.6% annualised from the first quarter.
This is only good news in a technical sense. A graph of South Africa’s growth in the last two years shows a zig-zag profile that is characterised by down quarters with prolonged strikes and up quarters when production “normalised.” The overall reality is that growth is likely to be only around 1.5% in 2014. Growth has averaged only 1.9% since 2009. This is not good enough.
It is not enough to create enough jobs for the millions of unemployed, under-educated people under the age of 30. It is not enough to stabilise the socio-political dynamics in South Africa. And in the short term it is not enough to allow the government to meet its fiscal targets.
The National Treasury is left in a bit of a predicament. They will be publishing revenue and expenditure targets in October for the next three years, but there will be no clear visibility on what the current year’s corporate income tax collections will look like until December. Weak growth has left government revenues below projections for several years – and will recur in the current financial year.
The deteriorating revenue outlook has resulted in a credit rating downgrade from S&P this year, with both Moody’s and Fitch retaining negative outlooks.
Morgan Stanley’s now retired chairman for Asia, Stephen Roach makes a key observation on persistent subpar growth: “It provides no cushion to shield economies from unexpected blows.”
He goes on to note that this “is especially true when growth falls below 1%, leaving a thin margin between expansion and contraction. Such sluggish performance is the economic equivalent of ‘stall speed’ – the heightened vulnerability that aircraft can encounter at low velocity. Under such circumstances, it does not take much to lead to an aborted takeoff, or worse.”
While Mr Roach was talking about the performance of developed economies in the first half of 2014, this should have resonance in South Africa. While the poisonous dynamic between labour and employers needs to be addressed, there are a number of measures that government needs to deal with.
There is a growing bureaucratic burden on businesses. As one practitioner put it, the legislation has run ahead of our level of development. In the period from 1 March 2013 to date, the various South African government departments published 2985 notices. Of these, 456 have been from the Department of Trade and Industry (DTI), 312 have been from the Department of Transport and 117 have been from the Department of Environment and Water Affairs.
The vast majority of these notices are issued with the best intentions. The relevant government department identifies a problem – and attempts to fix it with legislation. Unfortunately, there are two problems with the well intentioned people drafting the directives or notices or legislation. Firstly, the bulk of them do not take into account the limited capacity of the state to administer and police their new great idea. Secondly, very few of them have ever had to operate in the private sector. Therefore they do not understand the pressure that they are imposing on smaller businesses.
Ultimately, widespread job creation will only occur if small and medium-sized enterprises grow. Companies create a significant number of new jobs in their growth trajectory – not when they are established big corporates.
In recognition of the need to support this vital part of the private sector, the government created the Ministry of Small Business Development in May. Currently, this ministry appears to be housed in the DTI. An excellent first step for them would be to consider the impact on small businesses of every notice the DTI issues. That would be a great step to smoothing out the zig-zag pattern of growth.
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