The economy was growing more than 5% in 2007. Business confidence was near its postdemocratic highs. The Business Day of May 18 2007 quoted the Bureau of Economic Research: “The economy will grow faster than anticipated in the short term, buoyed by resilient consumer demand, ‘fierce’ momentum in fixed investment and stronger export growth”.
Ah, those were the days. Talk to economics students now and it takes quite some effort to convince them that there was such a time. To their minds it has always been doom and gloom, an inexorable slide to economic oblivion. Last week’s shock stage 6 load-shedding will have many joining them.
This has a profound effect on investor behaviour. Investment decisions are heavily influenced by recent information. Several studies have shown that investors tend to put their money in the investments that did best last year. Investors generally ignore Warren Buffett’s advice to be fearful when others are greedy and buy when others are fearful. So, with global markets down 20% in the year to date (though the JSE’s top 40 index is down only 11%) investors are conservative.
In the long run, economies tend to revert to the mean. In 1994, the average annual SA GDP growth rate was 2.3%. The problem for analysis of SA, is that it is not clear just when you should measure. Statistical analysis is useful when a system is in a steady state. But SA has been through several regime shifts, episodes that fundamentally alter the workings of the economic system. The data has distinct episodes — late apartheid, from 1985 to 1994, saw average growth of just 0.6%. Democracy brought a strong economic dividend — growth from 1994-2007 averaged 3.6%, but from 2008-2019 it averaged 1.5% (I leave out the Covid-19 years, which disturb the data).
Global growth has also been lower since 2008, but it has averaged 2.5% (but was 3.4% from 1994-2007). Was there a regime shift in 2008 in SA? I would argue yes — the main change post-2008 is the destruction of the state-owned enterprises under president Jacob Zuma. The SOEs, particularly Transnet and Eskom, but also the long tail of others such as the SA National Roads Agency and Trans-Caledon Tunnel Authority, plummeted in operational performance and new investment. This has imposed a big cost on the economy — companies cannot expand production, because there is insufficient electricity and no capacity to get goods out through rail or ports.
But is a regime shift under way now? I believe so. The private sector is filling the gaps left by Eskom and Transnet (and SAA, the SA Post Office and other dysfunctional SOEs). Eskom is set to become merely one generator of power and could well become a minority producer in the next five to 10 years. Transnet is, more slowly, going the same way, gradually concessioning ports to private operators and opening its rails to private services. This is privatisation of a sort — not the sale of state assets, but the exit from the market of state operators.
A key inflection point will come with the 2024 national elections. The ANC is set to lose its majority, with the only question being whether the loss will be small enough for it to lead a coalition, or large enough for opposition parties to be able to cobble together a government that excludes the ANC. This will be a critical moment and there is no playbook for how a coalition government will function. Will government be better or worse under an unstable coalition of unaligned parties compared with the ANC? In either scenario the pressure to spur the economy will be paramount, which means the political direction of increasing private provision of basic economic infrastructure will continue.
What does this outlook mean for investors? We are in a moment of regime shift, so we must not be overly influenced by recent experience. The focus must be on what the new regime looks like in future. In three to 10 years the economy will have a much more diverse set of service providers of key economic infrastructure, making it more competitive and stable. Wider global stability will return as inflation is calmed and war is ended. Global investment will be biased by a green transition, spurring demand for minerals such as nickel, manganese, copper, cobalt and graphite. SA is the world’s seventh-largest exporter of electric vehicle battery materials, and, if our energy and logistics systems (as well as some laws) are fixed could take strong advantage. There are also blue sky opportunities such as green hydrogen, which SA may be able to scale competitively into a whole new industry.
There are many risks. There is a wide spectrum of possible outcomes from the 2024 elections that are difficult to predict. Global risks abound too, not least the prospect of a recession in the short term and future pandemics. But if I had to bet, growth in the next decade of democracy will look more like the first than the last. The key is not to be overly persuaded by the near term.