In the latest edition of In conversation, Investec CEO, Fani Titi, and deputy governor of the South African Reserve Bank (SARB), Kuben Naidoo, chat to moderator Gugulethu Mfuphi about how to shift, change and rebuild South Africa.
Concerns in the short and long term
Kuben Naidoo, the deputy governor of the South African Reserve Bank (SARB), breaks South Africa’s issues down into short and long term concerns.
In the short term, Naidoo says that Covid has had an absolutely devastating impact on the economy and consequent job losses, and it’s been a longer downturn than anticipated. “The immediate priority is to get the economy to recover through widespread vaccination, but also by learning to live with the Covid-19 virus and its variants that may well be with us for years to come.”
In the longer term, Naidoo notes that South Africa has had an average GDP growth of 1% over the last 10 years, which is not enough to reduce the unemployment rate. In his view, longer term solutions need to go to the heart of the structure and efficiency of the economy, and its ability to create jobs.
Investec CEO Fani Titi agrees, saying that with a current unemployment rate of around 34%, South Africa has a significant challenge in moving forward to correct low growth rates, high unemployment and high equality.
In dealing with these short and long term issues, Titi says it’s important to understand that business confidence in the country was already low, and that while it was beginning to recover, the subsequent unrest in KwaZulu-Natal in mid-July undermined that sense of confidence.
Moving forward, Titi says that local companies and the government will have to work to invest in the economy with the hope that foreign investors will see that South Africa is still investable. “We still have an infrastructure programme we’ve to put into the ground, we still have a fairly stable financial system overseen by the SARB, and we still have a treasury that has been quite good in managing restricted finances of government,” he says.
"So, there are pockets of hope despite the unrest, Covid-19, poverty and inequality – but a lot of work needs to be done to recover from where we are."
So, what needs to be done?
Titi feels that Africa remains the frontier continent for foreign investors, with a lot of them seeing South Africa as a ‘beachfront’ into the continent as a whole.
However, current times – particularly the unrest crisis – have demonstrated that the state has been hollowed out in terms of its capability and capacity. In Titi’s view, this means putting skilled people into significant positions within government, in particular local government, where the ‘rubber hits the road’. “If you want to deal with issues of poverty at the local level, you need to make sure that you have competent people within local government,” he says.
Titi also emphasises the importance of prioritising growth, as out of growth comes employment, which allows people to improve themselves. As this happens, South Africa can then begin to deal with inequality over the long term.
“It’s about professionalising the state, de-politicising the state and understanding that there is need for partnerships between the private sector and the state.”
Growing the cake
When talking about South Africa’s economy, Naidoo points to a common narrative that says it doesn’t need to be grown – its wealth simply needs to be redistributed.
“The rationale here is that because some have lots and some have little, all we have to do is to carve up the cake differently,” he says. “While we should understand the historical legacy of that view, it’s not a sustainable solution, because the cake is insufficiently small for us to simply redistribute it in a fairer and more equitable manner. Rather, the entire economy (the cake) needs to be grown, through a balancing the act of attracting capital and providing the opportunity for that capital to make a good return.”
Redistributing wealth in the country also means taxing some of that capital and distributing it more fairly and equitably – but how does one get that balance right? “If you tax too much, then the returns are too low and you’re not going to get investment,” Naidoo says. “But even if you tax optimally, you need a partnership with the private sector to create an environment where people are incentivised to invest.”
If this partnership is done successfully, Naidoo believes South Africa will see economic and job growth, and wealth can then be redistributed equitably. He also notes, though, that this requires a capable state, an honest broker in the development process and an apolitical public service.
Banks supporting the economy
In terms of South Africa's response to the pandemic from a financial viewpoint, Naidoo says that SARB’s role had four parts to it:
Significant fiscal support financed by government and by the government deficit
Lower interest rates
An agreement by banks to continue providing credit and support to their customers by providing payment holidays, restructuring loans and restructuring debt
Significant injections of liquidity into the markets by the central bank
These four aspects all complemented each other and contributed towards minimising the downturn in 2020. In fact, the SARB was about to revise up its GDP forecast for 2021, but then the July riots happened, so those forecasts were pared back. Still, he says this was clear evidence that South Africa was on a recovery path.
“The positive factors driving that upward trajectory are good commodity prices, rapid growth in the rest of the world's economy, good house price growth in South Africa in a long time and new businesses that have been able to digitise and become more agile have started taking on staff and hiring,” he says. While all these factors contributed to some increase in confidence, the unrest put a dent in it, and sentiment will take some time to rebuild.
On the plus side, Naidoo says that South Africa’s banking system is well capitalised and highly liquid, which means it can be a positive contributor to the recovery.
“Under the present outlook of low and stable inflation, a relatively stable currency, continued progress on bringing down public debt and economic reforms, our base view is that interest rates are likely to stay relatively low and accommodative for a long time.”
While he does think that interest rates will rise over the next two to three years, SARB’s view is that it will remain relatively low for some time to come.
Titi says it is globally understood and accepted that South Africa has one of the best reserve banks in the world in terms of its independence, technical ability, and how it responded to the Covid-19 crisis. “The scale and speed of response was pretty fantastic, and we had meetings with other banks and SARB for them to get a sense of what is happening on the ground, because banks are in essence a transmission mechanism into the rest of the economy,” he says.
In periods of crisis, Titi says banks must work with clients to support them.
“At Investec, we look at ourselves as partners on the journey of creating growth, both for our clients and for the economy as a whole. We tend to work with our clients through difficult times, and make sure that they can get to the other side.”
As well as good monetary policy, Titi says South Africa needs to have fiscal and macroeconomic policy that is much more growth focused, with decisive action taken to implement it – particularly from government.
He’s been encouraged by statements from South Africa’s new finance minister around the need to understand social security on the one hand due to widespread poverty and inequality. But more importantly, in looking to support the destitute and the poor, South Africa does not sacrifice the potential of the country going forward.
This means balancing social security with the need for investment and the need to safeguard the finances of the country. “If you only look at social security, your finances may actually be compromised, your sovereign credit rating may be compromised, and you're not able over time to continue to invest,” he says. “These are balancing acts that are particularly important for us to look at, but the private sector is a willing partner.”
Private sector involvement and transformation
Naidoo comments that because South Africa’s public sector balance sheet is stretched, it’s important to bring in private sector capacity. However, if South Africa is to have growth-friendly policies, the private sector will need to play a bigger role in the transformation of business, both in terms of race and gender, but also in terms of ownership.
In return, Naidoo says the private sector needs to accelerate transformation in the economy, where boardrooms and executive teams transform over time to have more women, more black people, and to gradually broaden their ownership base. While this has to be done, it should be implemented gradually and sensibly, and not at the expense of growth and jobs.
In terms of the economy, Titi feels that growth and transformation are interlinked to have a predictable future for South Africa, and that it is in the interest of business to see transformation.
“If we see more black and women becoming successful, both in terms of their careers, both in terms of starting businesses, you create a bigger cake that allows for business to be more successful,” Titi adds.
He points to transformation already happening in South Africa’s banking industry where half of the chief executives are black people. “So, while progress may look slow, it’s ongoing and we should do everything in our power to increase the pace in a way that supports growth.”
Investment and quick growth
In terms of the international investor market, Titi says nobody’s going to do South Africa a favour by putting money into the country – they’ll do it if they feel there’s a level of safety for their investment and a reasonable chance of a return.
In terms of where the country can move very quickly in terms of growth, Titi points to South Africa’s highly developed digital and telecommunications sector. “I think we could do with a bit more liberalisation around that sector to spur economic activity,” says Titi. When data prices down when connectivity is a lot more broadly available, for example, this benefits the poor.
It’s all about policy certainty
In terms of moving the country forward, Naidoo feels that policy certainty is very important in helping people make long-term investment decisions. “Our markets are very liquid and our economy is very open, so if you do the right things, you can get both portfolio inflows and investment that goes into the economy long term, but you need to have a level of certainty around what the environment is going to be in five, 10 or 15 years,” he says.
Naidoo feels that this policy certainty could be reinforced by a ‘virtuous cycle’ of economic growth, job creation and transformation happening in the private sector at a faster pace.
“It's about creating an environment of rational dialogue, where the private sector can talk to government, where government can talk to the private sector, where there's mutual trust and mutual respect, which is going to come from essentially two ingredients: growth-friendly policies and sustained progress in transformation.”
As well as fighting corruption, Titi says that South Africa needs to ensure that its organs of state are capable, independent and empowered to be able to do what they need to do. As it stands, South Africa has a very advanced economic system and business sector.
“But, for example, if investors want to invest in a mine, it requires them to make a decision that covers 20 years. It requires the right environment where there are proper incentives, where they have policy certainty. Policy certainty is important, because you want to have a sense of what the tax or BEE policy will over time, as opposed to changing these midstream.”
Titi says the ability of government to make decisions quicker is important moving forward, but that the business sector will be a positive contributor to any such development and economic growth that is possible going forward.
Unpacking the social unrest
In terms of the unrest that happened in KwaZulu-Natal in mid-July, Titi says there was a sense of surprise among international investors that, after over 27 years of great stability post the transition to democracy, this could happen in South Africa. Despite the destruction and destabilisation, the unrest was relatively contained, and overall, it gives us the opportunity to make changes and move the country forward.
So how do we know it won’t happen again? Titi feels this can be done through a more capable state, more urgent investment to support growth and a social compact between government, civil society and business on what we need to focus on.
He says South Africa still has substantial advantage: it’s a beachfront into the rest of the continent given the Free Trade Agreement, it has a sophisticated financial system and a highly developed business sector. But as a country, Titi feels we will need to make some hard decisions.
He adds that we have to talk truth to the government, and similarly the government has to talk truth to the business sector.
“Ordinary citizens have to insist they want better education and healthcare – not to pay more for it, because what we already pay for this and many other services is enough to get us a much better outcome. We have to be tougher as a country in a way that’s collaborative and that tries to take the country forward.”
South Africa on the upward path
Naidoo remains optimistic that South Africa's economic prospects are on the upward path, as long as there is a combination of increased trust and citizen participation, falling corruption, and kickstarting the economic engine. “It's not going to be stellar, it's not going to be smooth sailing, but I do believe that we've got the ingredients to do that.”
Overall, Naidoo feels that even if a government is committed to good policy, to fighting corruption, and to stable public debt, it’s up to everyone else to hold that government to account. ‘We’ve got to demand better services,” he said.
“It starts with individuals making a contribution to ethical living, to ethical government, to ethical standards in the public sector, and to ensuring the best standards and the best quality services.”
This Focus article also forms part of the Business Class series. For more insights into other Business Class content, click the image below:
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