Annabel Bishop, chief economist at Investec Photo: Facebook
JOHANNESBURG - While South Africa has seen its credit ratings fall since 2009, and is now on the cusp of becoming a pure sub-investment grade rated country from the three key agencies, not all is lost.

The country has made its way up the credit rating path before to A grade, even an A+, and it can make it back again. This previous upwards credit rating trajectory occurred in the 2000s, and was driven by strong economic growth, fiscal consolidation and good governance of both state-owned-enterprises (SOEs) and general government.

In the early 2000s, the government started the upgrading of the country's infrastructure while following fiscal consolidation. Through improved fiscal management, money was available to spend on infrastructure, with good management typically yielding quality infrastructure on time, within budget and which supported private corporate sector expansion.

Fixed investment growth accelerated to double digits over this period, propelling economic growth to above 3percent year-on-year, then onwards to above 5percent year-on-year and unemployment to below 22percent. Credit ratings rose, with an A+ from Moody’s.

Business confidence

The expansion of fixed investment in the 2000s, in partnership with the private sector, generated increased demand for goods and services. This, along with free market policies, entrenched the protection of private-sector property rights and strong institutions, creating a virtuous cycle that boosted business confidence, and so corporate sector and economic activity in the 2000s.

Economic policy focused on the imperatives of expanding the ability of the economy to produce (increased potential growth), ensuring sufficient infrastructure was in place to support faster growth.

The expansion of the productive capacity (private, parastatal and government fixed investment) of the economy allowed it to respond to increased global demand for South Africa’s exports as global economic growth accelerated during the 2000s, and commodity prices lifted. This is a key point as metal prices rose by over 50percent and the country was largely able to take advantage of this. Indeed, most of the 2000s saw the highest consistent growth rate in 35 years. This all ended in 2009.

There is a very close correlation between South Africa’s gross domestic product (GDP) and total fixed capital stock (or productive capacity). Between 1946 and 1981 GDP growth averaged 4.5 percent, growth in fixed capital stock 4.7 percent.

Demand, mining activity and government infrastructural investment fuelled growth in the country's productive capacity during most of the 1970s.

Political situation

From 1982 to 1993 productive capacity increased by only 1.5percent on average, growth slipped to 0.8percent as many investors, both foreign and domestic, either developed a wait-and-see approach, or disinvested in response to the domestic political situation.

This is occurring again now, due to the high level of political volatility and uncertainty, the substantial deterioration in government finances since 2009, the ongoing threat to private-sector property rights and numerous instances of poor governance in a bloated state.

South Africa needs to reform governance of SOEs and match future capacity to likely growth outcomes.

State intervention and control of the economy must substantially reduce, with free market policies followed instead as these increase economic freedom, and so dramatically increase GDP growth, employment, confidence and investment.

South Africa needs to be more efficient and effective in public expenditure, with a strong focus on cost-saving (and the eradication of corruption). The state can be aided by increasing public-private sector partnerships with successful, non-corrupt businesses.

Rational expectations of sustained future robust economic growth will naturally stimulate growth in private-sector fixed investment. Successful delivery by the government of its part in productive capacity is a prerequisite to drive domestic growth.

Annabel Bishop is the chief economist at Investec Bank South Africa.

The views expressed in this article are not necessarily those of the Independent Group