ANALYSIS: Gigaba’s plan too timid to reignite growth

On the same day that government released a new version of the mining charter, which is likely to retard investment and growth, finance minister Malusi Gigaba briefed journalists on how he plans to rescue the economy from recession. He promised action in areas in which progress has been lacking, including faster reform of state-owned enterprises (SOEs), the rollout of high-speed Internet, finalisation of mining policy, and signing of independent power producer contracts.

He has already delivered by appointing an experienced treasury official as his director-general, and gazetting the Financial Intelligence Centre Amendment Act, as well as moving fast to try to stabilise SAA.

These actions have been encouraging, says the CEO Initiative, but “there is still much more to be done”. At the top of the lists of the CEO Initiative and Business Leadership SA is that a judicial commission of inquiry be appointed to investigate state capture.

This is beyond Gigaba’s purview, but unless corruption is dealt with, government cannot repair its relationship with business. Gigaba, himself implicated for having appointed people with Gupta links to SOE boards, faces an uphill battle to win trust.

“The minister has asked that we judge him on his actions and not on what we hear and read,” said the CEO Initiative after meeting Gigaba. “We have, in turn, repeatedly assured the minister that we are watching his actions … swift action in a number of key areas would go a long way to rebuilding confidence and returning much-needed investment.”

Restoring business confidence and implementing a judicial inquiry into state capture are crucial

Nomura strategist Peter Attard Montalto is disappointed by Gigaba’s list of promised reforms, saying he offered nothing particularly new and “there was no rabbit-out-of-a-hat moment”. More important, he says, is that nothing addresses the trust and leadership deficits. These are “the most serious and pressing restraints on economic confidence”.

Former finance minister Pravin Gordhan’s greatest achievement was that he united the social partners behind a common purpose — to avoid the junking of SA’s credit ratings. That effort was built on trust, co-operation and leadership.

Moody’s seems to agree that it all comes down to restoring trust and confidence. This week Zuzana Brixiova, its lead sovereign analyst for SA, noted that, in the first quarter, business confidence collapsed to levels last seen in the global financial crisis.

This means investment will be further delayed and, with it, a sustainable growth recovery, she says. “This will ultimately make fiscal consolidation more challenging.”

So instead of gross debt peaking at treasury’s target of 52.9% of GDP next year, Moody’s expects the debt ratio to hit 55% and keep climbing.

For Moody’s the bottom line is that “without improved trust in policymaking, it is likely that SA will remain in a low-growth trap”. But there is no sense from Gigaba’s policy plan that he understands that the reforms he is pursuing lack the potential to significantly shift the needle on growth.

In a peer-reviewed working paper in 2013, three treasury economists set out to find which reforms would deliver the biggest payload in terms of growth and job creation.

They found that just three if combined, could have dramatic effects. They were: boosting skills and productivity; increasing foreign direct and domestic investment (hiking the savings rate), and slashing transport and communication costs.

If Gigaba is serious about getting SA out of a recession he will have to think bigger and act more boldly. Instead of asking business what boxes it wants ticked, he will have to consider which big economic policy levers he can pull to get growth going.

He says he is looking at ways to leverage the rebound in agriculture to advance agro-processing and increase support for farmers; explore funding for a new economic competitiveness support package for industry; and engage the finance sector and Reserve Bank to see if there is scope to loosen credit conditions.

But with state finances badly constrained, he can offer little stimulus by way of fiscal policy. The Reserve Bank could help by cutting interest rates, but it would take deep, consecutive cuts to boost growth when confidence is so low, and this is unlikely for now.

The risk is that confidence and economic growth still have a lot further to fall. This is certainly the message of the Merchantec CEO Confidence Index, which recorded a 25% decrease in CEO confidence between the first and second quarters. Most CEOs expect political instability, the ratings downgrades and tax increases to hinder growth for the rest of the year. Overall, CEOs’ economic growth expectations plummeted by 40%.

The most bearish economists fear growth could be negative for the year as a whole. With the Reserve Bank and treasury hamstrung in what they can do, it will take a political solution to prevent the economy from its continuing slide. The longer that takes, the worse the damage will be.

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