SA economy is an Uno trying to be a Ferrari
22 Jul, 2022

South Africa is in urgent need of implementing the economic reform policies it has promised to do, but failed to deliver on, to turn the South African economy around.

These were the words of warning by Dr Thabi Leoka, founder of economic consulting and advisory company Naha Investments, at the recently held Allan Gray Investment Summit, who painted a grim picture of the state of the SA economy. The virtual event brought together local and international investment managers and other finance experts to share their perspectives on how to make sense of the current environment and invest for the future.

“To turn the economy around we really need to go back to the basics and look at what the easy wins are. The answers lie in fixing our education system, rolling out Spectrum in the telecommunications space as quickly as possible, and dealing with the low-hanging fruit where our economic policies are working against us,” said Leoka.

She explained that if you drill into the numbers, economic growth has not increased over 0.9% in the last 10 years, but, if government together with the private sector were to invest in more infrastructure projects, SA could deliver growth of between 4 – 5%.

“The latest GDP data shows that the economy grew 1.2% in the second quarter of this year compared to 2020. But if you compare this to pre-COVID-19 levels, the economy is actually 1.4% smaller than what it was then, which is worrying,” says Leoka. “We are also bound to see a decline in business confidence as economic growth declines. The current environment is simply not conducive for businesses to want to invest, given the political and economic risks at play.”

She added that households have been struggling given the increases in rates and taxes, job losses, and salary cuts, which have had a major impact on household consumption.

“We need household consumption to increase, but we are unlikely to see large increases in household spending any time soon. Banks are not giving credit extensions to households given that they are being very cautious in the current environment, and people aren’t applying for loans because they are already over indebted.”

She said that South Africa has a very diverse economy, that if utilised correctly, would be able to deliver growth.

“The problem is that the sectors that should be growing – agriculture, manufacturing, tourism – are not. Manufacturing used to make up 20% of GDP but now it is closer to 13%. If we stimulate these sectors, they can help us deal with the problems of poverty and unemployment.”

The sector that is growing the fastest is finance, which uses skilled labour, but South Africa doesn’t get revenue from this sector, unlike mining, and it is not labour-absorbing.

Leoka said that SA produces approximately 60 – 65% of the world’s chrome, yet SA does not derive any benefit from using the metal in the manufacturing process on home soil – because it is exported to places like China.

“One of the examples of how our economic policy is working against us is with the export tariffs we place on the producers of chrome in South Africa. We should rather be putting import tariffs on chrome, which is done successfully with our emerging market counterparts like Brazil and elsewhere.”

She explained that the telecommunications sector needs to urgently roll out the highly anticipated Spectrum project, which will increase broadband coverage at a lower price point, allowing more entrepreneurs and businesses to flourish. This will in turn create more jobs and decrease the appalling unemployment figure of 44%.

“You cannot use a Ferrari effectively if you have an engine of an Uno in that supercar. This is our economy – we have such a wonderful diverse economy with opportunity that beckons, yet 44% of our nation is not working. At the same time there are solutions we can apply today, that we are not doing.”

She said that another solution is overhauling the education system, given that “the matric certificate is not worth the paper it is printed on”.

“If you look at the number of graduates that can’t find jobs, most of them are TVET graduates; these colleges have not worked,” says Leoka. “We need the education system to deliver matriculants who understand business so that they can start their own ventures, and create employment. We also need more flexibility of the degree requirements and subject choices at university, so that we can get more people employed.”

She said that South Africa needs to move away from throwing “money at the poor to solve problems” as this creates reliance on government grants.

“The poor have been increasing as a direct result of policy implementation,” said Leoka.

In 2000, there were 7 million grant recipients, in 2010 there were 14 million, and in 2021 there are 18.4 million people who rely on social grants.

“We can’t spend our way through our problems. We are allocating a lot of money to consumption, but we need to allocate more to investment to grow the economy. We are also spending more money servicing our debt (11.8%) than we are on health (11.55%); it doesn’t make sense. We need growth to be suitable for our economy, but it is not,” concluded Leoka.



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