Ahead of next year’s national election major private sector investment decisions are on hold, according to Absa Capital economist Peter Worthington.
At a presentation in Johannesburg yesterday, he warned that alarming policy statements from politicians in the run-up to the elections would delay capital projects, damaging the economy’s growth potential. And an unfriendly business environment after the election could cause them to disinvest.
This would have negative consequences for the economy as well as the rand. Since early May, the currency has fallen from about R8.90 to the dollar to about R10. A weak currency boosts inflation and makes rate hikes more likely than rate cuts.
Worthington predicted that large companies, particularly those with foreign headquarters, would wait until after the election before making decisions on investment – or possibly disinvestment.
“If the ANC loses more support to the DA and Agang SA than to Julius Malema’s Economic Freedom Front, that could pull policy in a more market-friendly direction.”
He suggested this scenario could prompt the government to take a “more robust attitude to the veto that labour seems to have on necessary changes to the labour markets”.
In line with other economists, Worthington identified policy uncertainty, labour problems and energy constraints as a drag on economic growth.
Discussing the destabilising impact on the mining sector of the Mineral and Petroleum Resources Development Amendment Bill, he described it as a “problematic piece of legislation”, noting that it allowed for, among other things, the minister to require mines to sell their output locally at below the market price.
He said: “The mining sector is very capital intensive with expensive investment projects with very long lead times. Companies need certainty. They can deal with state requirements for social development or to promote local beneficiation but what they really want is certainty. And that legislation just generates uncertainty.”
Worthington noted that the country was operating on the same electricity supply capacity as it had in 2007. For confidence to improve, business would have to “see signs that the capacity constraints in energy and other infrastructure are going to be alleviated. It would require a change in policy on the private sector’s involvement in energy production. And it would need better labour relations, which requires intervention from government”.
High commodity prices in earlier years had masked low growth in export volumes that were partly due to bottlenecks at ports and railways, he said. At this critical juncture, strikes could do further damage, “while mining houses are talking about shuttering shafts”.
At the same time, capital equipment for the infrastructure programme is swelling the import bill. South Africa’s current account deficit – the gap between earnings from exports of goods and services and the import bill – is equal to 6.5 percent of gross domestic product.
And Worthington said this situation would likely persist.
A large current account deficit makes the rand vulnerable to further weakness.