Sentiment – it’s no conspiracy

POSTED ON: February 18, 2021 IN , , , , , , by BLSA

By Busi Mavuso
There is no ‘conspiracy’ against SA; the poor investment sentiment is a result of poor policymaking and policy uncertainty.

Some political players are resorting to conspiracy theories to pin the blame for the poor investment sentiment towards South Africa on investors. Let’s be clear: it isn’t the investors or their sentiment that’s at fault, but the root cause of this sentiment is poor policymaking and policy uncertainty, widespread corruption with little visible accountability, the distressed nature of our state-owned enterprises and rising unemployment – among a wide range of other issues.

While one must commend President Cyril Ramaphosa’s administration for its overtures to industry and other social partners in recent years to build better channels of communication, there are still areas of concern that continue to weigh on sentiment and visible action is simply too slow.

Generally, investor sentiment turned against emerging markets in the middle of 2013 when the US Federal Reserve first suggested it would begin to cut back on quantitative easing (QE), its massive stimulus programme which began in response to the global financial crisis of 2007/08. In essence, it printed dollars to buy US treasury bonds and other assets in a bid to keep cash flowing through the economy.

But this pushed US yields lower, which saw investors turn to emerging markets in search of better yields. Comforted by the sustainability of its recovery from the financial crisis and global recession, the world’s biggest economy, in merely suggesting that QE would end, enticed investment back to the developed markets.

Change in sentiment

That’s a rather simplified breakdown. The fate of emerging markets was also tied to China’s appetite for raw materials. But with the US dollar set to strengthen as QE was going to be curbed, the easy money that had flowed South Africa’s way was over. Sadly for us, this change in sentiment coincided with the final and more desperate years of the presidency of Jacob Zuma. Those years would be marked by an uncertain policy environment and rampant corruption, both of which still haunt us to this day.

We cannot control the sentiment towards emerging markets generally, but we can control sentiment towards our country – and that’s where we’ve failed. As much as some policymakers tout a conspiracy against the country as the fundamental cause of the negativity, it’s more a case of our own goals against a backdrop of an already unsupportive environment for emerging markets.

The negative sentiment towards South Africa has fed into low levels of investment into the economy and lower investment is a driver of lower growth. The policy uncertainty is caused by poor policy formulation – for example, around issues such as electricity and telecommunications. Uncertainty pushes businesses to cut back on production, investment and employee numbers. Investment simply flows to where this uncertainty does not exist.

These conditions are reflected in the statistics for domestic and foreign investments. According to Statistics South Africa, in the first three quarters of 2020, private sector investment in SA fell to R404bn from R473bn in the same period in 2019. And foreign direct investment (FDI) into SA plunged by 46% in 2020 to $2.5bn, according to data published in the United Nations Conference on Trade Development’s 2020 World Investment Report. That was off an already low base: in pre-Covid 2019, FDI fell 15.1% to $4.6bn from $5.4bn in 2018.

The large capital projects that business and government have agreed upon are important to our economic recovery from the Covid-19 pandemic but are particularly sensitive to high levels of uncertainty, given their high cost and long-term duration.

Poor policy formulation is evident in the story of the spectrum auction that has been delayed for more than a decade. It was finally expected to be completed by the end of March, but court actions against the process by both MTN and Telkom are more than likely to result in further delays. Both telecommunication firms are taking the Independent Communications Authority of SA to ask about the process followed in unlocking additional spectrum that would feed into cheaper and more widely available broadband.

With regards to mining, business has suggested the government change the Mineral and Petroleum Resources Development Act to limit administrative discretion and impose strict time periods for making decisions. Mechanisms should also be adopted to promote greater exploration and greenfield projects. While the proposed improvements in administrative efficiency and geological information systems will help, major capital investment requires a climate where business leadership is actively encouraged with long-term confidence in tenure of property and dilution of returns fixed through certainty on ownership requirements.

With the right investment taking place, the industry will be positioned for growth and, with that, a considerably more meaningful contribution to broad empowerment through transformed procurement, employment and socioeconomic development of mining-dependent communities.

Poor investor sentiment

We have seen government policy promises being broken in so many areas so there is no real improvement in the trust deficit, which further undermines business confidence and exacerbates the problem of poor investor sentiment. Repairing this trust deficit and bolstering confidence are key to realising President Ramaphosa’s goal of attracting much-needed foreign direct investment and local investment into the country. It’s a job that has been made so much harder by the Covid-19 pandemic that has heightened competition among emerging market countries to attract investment and dramatically increased our cost of capital.

While still being singled out as being one of the most attractive investment destinations on the continent for the diversity of the economy among other strengths, the UN World Investment Report also raised concerns about South Africa’s heightened levels of corruption, structural issues in electricity supply and logistics. “Investors are also worried about the lack of clarity concerning policy and structural reforms,” it said.

As we face the daunting task of overcoming the pandemic and its health and economic effects on the country, we should aim to ensure greater clarity in policy formulation in meeting the government’s commitment to structural reform. Muddy waters feed uncertainty and negative sentiment.

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