Annabel Bishop, chief economist at Investec Photo: Facebook
CAPE TOWN - South Africa has seen its credit ratings fall since 2009 and is now on the cusp of becoming a pure sub-investment grade country according to the ratings of the three key agencies. 

But 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 South Africa’s infrastructure while following fiscal consolidation. Through improved fiscal management, money was available to spend on infrastructure, with good management yielding quality infrastructure delivered on time, within budget and which supported private corporate sector expansion.

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

The expansion of fixed investment 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 saw corporate economic activity lift up.

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 more than 50% and the country was largely able to take advantage of this.

Indeed, most of the 2000s saw the highest consistent growth rate South Africa had experienced in 35 years. This all ended in 2009. There is a very close correlation between South Africa’s GDP and total fixed capital stock (or productive capacity).

Between 1946 and 1981 GDP growth averaged 4.5% and growth in fixed capital was around 4.7%. Demand, mining activity and government infrastructural investment fuelled growth in the country’s productive capacity during most of the 1970s. From 1982 to 1993 productive capacity increased by only 1.5% on average, while growth slipped to 0.8% as many investors, both foreign and domestic, either developed a wait-and-see approach or disinvested.

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.

       File image: IOL

South Africa needs to reform governance of SOEs and match future capacity to likely growth outcomes. State intervention and control of the economy must be substantially reduced, with free market policies followed. 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. Successful delivery by government of its part in productive capacity is prerequisite to drive domestic growth.

Annabel Bishop is the chief economist at Investec.

The views expressed here are not necessarily those of Independent Media.