By Raymond Obermeyer, Managing Director, SEW Eurodrive

For South Africa to achieve any degree of meaningful economic recovery requires an ideological shift in the ruling party and for government to stop dragging its heels on implementing structural reforms.

The state’s fiscal position, as the Minister of Finance Tito Mboweni outlined all too clearly in his recent budget speech, is in an alarmingly precarious position. Our rapidly deteriorating debt situation pushes the country ever closer to the fiscal cliff as government continues to spend more than it collects.

Each year government spends more on consumption expenditure such as the public sector wage bill and social grants and redirects funds away from initiatives that have the potential to grow the economy. As a result unemployment is currently at record highs of 32.5%, according to Stats SA.

In his budget speech Mboweni said government’s intention was to create a more conducive business environment including lowering the cost of doing business. However, it appears there is little consensus on how to achieve this within many government departments.

The Department of Mineral Resources and Energy revealed in late February that it had a backlog of 5 326 applications for mining and prospecting rights, mining permits, renewals and cessions. This backlog impacts new investments into the mining sector and without new investments the sector will find it difficult to create new job opportunities or expand exports.

Policy and regulatory uncertainty, particularly around changing goalposts in the Mining Charter, coupled with an unreliable power supply have long deterred investment into the mining sector. As a result South Africa is being seen as a less attractive investment destination for mining companies.

This is borne out by the fact that the country dropped an alarming 40 places in the Fraser Institute’s annual Investment Attractiveness Index for the mining sector. The index is constructed by combining the Best Practices Mineral Potential Index – which rates regions based on their geologic attractiveness – and the Policy Perception Index – a composite index that measures the effects of government policy on attitudes towards exploration investment. Investment decisions are not made based only on the mineral potential of a jurisdiction. In fact, according to the Fraser Institute, approximately 40% of investment decisions are determined by policy factors.

South Africa is currently in 60th position in the index out of a total of 77 countries. Of the 13 African countries ranked in 2020 only Tanzania and Zimbabwe rank lower than South Africa.

Although government’s planned infrastructure investment is – on the face of it – encouraging, the reality is that infrastructure spend is on the decline. Exacerbating the situation is the fact that government does not have a particularly good reputation when it comes to infrastructure implementation with numerous projects dogged by allegations of corruption, mismanagement and over spending.

A joint venture structure between the Presidency and National Treasury – Operation Vulindlela – which aims to accelerate the implementation of projects, appears to have made little meaningful progress, despite claims to the contrary from the finance minister.

This is unfortunate as infrastructure spend has the potential to be a positive driver of sustainable economic growth. Government is, however, very constrained in terms of its resources. As such it has no option but to partner with private enterprise in order to rollout planned infrastructure projects despite its frequent ideological objections to doing business with the private sector.

State owned enterprises and a bloated public sector wage bill will continue to be a drain on the fiscus for the foreseeable future. Should the state not be able to resist trade union demands for higher wages for public sector employees government will have no choice but to borrow more money, leaving the country’s finances in an even larger pool of debt.

Ratings agencies and economists have been calling for reforms for years and yet government appears unable to commit to sweeping changes. While it continues to resist the need for economic reforms, the country’s slide down the global competitiveness ranking persists. South Africa, which was ranked in 37th position in the IMD’s global competitiveness ranking in 2001, was last year ranked 59 out of 63 countries. Expect a further deterioration in this ranking unless government heeds the IMD’s call for policy reform to enable a sustainable business environment.