By Ian Kilbride
The great economist of the 20th century, John Maynard Keynes, described fluctuating business confidence and pessimism as “animal spirits”. Though Keynes was describing the psychological mindset of business and investors, particularly during economic recessions and depressions, the converse can also be applied to understand the irrational exuberance that fuels stock market frenzies and their inevitable crashes.
Whereas business confidence indexes are measured and published regularly as hard data, the emotional and psychological elements informing business confidence are less thoroughly interrogated. Even in the era of financial technology and predictive artificial intelligence, investors and businesspeople are not merely robotic in their decision-making. Together with data, business decisions are influenced by a host of emotional, psychological and behavioural factors which, at times, can lead to irrational and herd mentality.
Business confidence is important in a number of respects. It has a direct effect on economic growth, the impact of which is amplified during times of recession. A decline in business confidence tends to harden and deepen recessions. Of course, there is a circularity to this phenomenon in that recessions themselves erode business confidence, but business is not a neutral or passive actor and sentiment is a critical driver.
As former Federal Reserve chairperson Ben Bernanke observed during the 2008 global financial crisis, “As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets.”
Business confidence also enjoys significant predictive capacity, with its indexes typically indicating both upturns and downturns with considerable accuracy.
But what impacts business confidence? These factors can be categorised as external and internal. Externally, global business confidence cycles themselves play a significant role in domestic business confidence as do global shocks such as wars, energy crises, inflation and black swan events such as the Covid-19 pandemic.
Domestically, the direction of structural macroeconomic factors such as gross domestic product, inflation and interest rates are all critical to business confidence. The impact of material issues such as the energy crisis are all too obvious on sentiment, but the impact of other factors such as crime and corruption are more difficult to measure. While the evidence of the negative impact of corruption on national economic growth is strong globally, only recently has the evidential link between corruption and business sentiment been established internationally.
In the case of crime, it is not merely personal security that deflates business confidence (and adds a significant premium to operating costs), but in extreme cases, criminal syndicates ingratiate themselves so deeply into the particular sector as to make it unviable for legitimate business to operate.
Here one need look no further than the tobacco sector and construction sector. The tobacco market has effectively been captured and turned upside down by multibillion-rand illicit networks resulting in a significant loss to the fiscus. Similarly, construction mafias have effectively brought to a standstill housing and infrastructure projects wherever they operate.
While policy credibility is a key determinant of business confidence, conversely, policy uncertainty erodes confidence and is almost entirely the responsibility of government. Some policy uncertainty is fundamental to declining business confidence.
For example, business confidence in the South African mining sector has also fallen down a shaft. The authoritative 2022 Simon Fraser Mining Investment Attractiveness Index takes mineral and policy perceptions into account and ranks South Africa as the 57th least attractive jurisdiction for mining investment, below that of the DRC, Papua New Guinea and Tanzania.
Politics also plays a disproportionately significant role in local business confidence. President Cyril Ramaphosa’s promise of a new dawn and international investment roadshows temporarily boosted business confidence, but by contrast, Pretoria’s position on the Russian invasion of Ukraine and its reported support of Moscow sent the rand into a tailspin, taking business confidence down with it. Provocative public rhetoric from the EFF’s Julius Malema such as “Kill the Boer, Kill the Farmer” can only harm fragile business confidence even further.
But all is not lost. Rather than allowing business sentiment to be driven by state failure, South African business is seizing the initiative to help solve some of the fundamental issues driving negativity. Under the aegis of Business for South Africa (B4SA), 110 corporate CEOs, whose companies have a combined market capitalisation of R11 trillion and employing more than 1.2 million, have pledged to help tackle three key areas of energy security, transport and logistics and crime and corruption.
While the impact of the B4SA initiative will only materialise in the coming months, the impact of the CEOs’ public statement of belief in the future of South Africa provides a significant boost to business confidence.
Ian Kilbride is the chairperson of Spirit Invest.