Investor Perspectives

Is South Africa sliding backwards or making progress?

By Stef Terblanche

·          Published in The Intelligence Bulletin and The Monday Briefing,  August 2013

When releasing its Development Indicators Report for 2012 last week, the South African government put a positive spin on its findings, saying South Africa is “on the right track”.  However, comments that followed from others were mostly negative. And the picture painted in the media the past five years has been one of a country on a downward slide. But how do the major international surveys, international investors and others view South Africa?

Highs and lows of the report

When releasing the report last week the Minister in The Presidency for Performance Monitoring and Evaluation, Collins Chabane, delivered a statement  saying “the evidence suggest that indeed life has changed for the better since 1994 and the country is steadily making progress in the key priorities it has set for itself”.

“There are many assessments from time to time about how we are doing as government or as the country as a whole but the Development Indicators Report is the definitive assessment and it tells us we are on the right track and doing well,” he said.

The report is based on 85 indicators clustered according to 10 themes, including economic growth and transformation, employment, poverty and inequality, good governance, among others.

Focusing on a number of highlights in the report, Chabane emphasises the good progress being made in various aspects of education and health. While crime remains worryingly high, he says the “government is making an impact” on it. On the economic front the report shows South Africa has maintained stability, but growth has been hampered by the global crisis and industrial conflicts. However, Chabane says “data shows significant setbacks in our ability to reduce unemployment, poverty and inequality” while “unemployment remains a challenge, especially for the youth”.

The report boasts about government’s commendable success in delivering housing, water and sanitation, as well as the fact that the number of registered individual taxpayers grew from 1.7 million in 1994 to 14 million in 2013. It says the country's transparent Budget process is also highly regarded world-wide.

This is “the good news” singled out by Chabane and the government. Trends in respect of the other indicators were much more negative, and Chabane made no mention of them in his statement.

And public opinion has been much less optimistic over the findings of the report than the government. For instance a SAPA report published on News24 pointed out that less than a year before the next general election, public opinion on government's basic services delivery has sunk to its second-lowest recorded level, while service delivery protests hit an all-time high last year. It quoted Deputy Minister in the Presidency Obed Bapela saying that this was a worrying trend.

In the Daily Maverick Ranjeni Munusamy argues that South Africans have an increasingly negative outlook on the performance of government and that the country is also slipping back in the corruption perception index. She writes that the report “reveals a range of unfavourable indicators about the state of the country, which despite the best efforts by government, is difficult to project in a positive light”. She also raises the service delivery issue.

Before and after Zuma

Much of the of the positive trending started way back in 2004 or shortly thereafter, while much of the worst escalation in negative trends seems to coincide with the period after the administration of President Jacob Zuma took office. As far as the economic picture is concerned, it should be said in their defence that they took office shortly after the onset of the global recession and in the same year that South Africa went into recession. And the world is still battling to recover.

Nonetheless, drawing on the figures in the Development Indicators Report, Democratic Alliance (DA) finance spokesman Tim Harris, sketches a shocking picture. The number of discouraged work-seekers - who have given up all hope of finding a job - has increased by 1.139 million since 2009. And the country’s global competitiveness ranking as measured by the Word Economic Forum fell five places to 50th between 2009 and 2012. Foreign Direct Investment (FDI) decreased from R100.291 billion in 2008 to R1.673 billion in 2012.

In a number of other areas however, South Africa’s poor performance and problems cannot be blamed on recession and the subsequent global economic problems that also affect South Africa. But neither can the Zuma administration be blamed fully for all of it as a number of these negative developments were in the making since before Zuma took office.

However, also in this period South Africa also slipped 14 places on Transparency International’s Corruption Perception Index. The Zuma administration is struggling to end South Africa’s serious electricity supply crisis that almost crippled the country a year before he came to power. The period was also marked by the rise and fall of Julius Malema and the damaging debate centred on his demands for the nationalisation of South Africa’s mines with government being excruciatingly slow in providing certainty on this score.

Other negative events in Zuma’s time include the imprisonment of one corrupt National Police Commissioner and the sacking of another; a number of cabinet ministers being implicated in a variety of scandals; the governing alliance effectively blocking implementation of the National Development Plan; serious divisions and power struggles tearing the ANC and its alliance apart; rising labour militancy and unrest resulting in the deaths of 44 people at Marikana, escalating wildcat strikes, the torching of Western Cape fruit farms, investment in the mining sector falling off the cliff, and the entire labour relations dispensation becoming unstable; attempts to curb the independence of both the judiciary and the media; the cost of living spiralling out of control especially in the two categories that directly affect most people, namely transport and food; service delivery protests rocketing to new highs; municipalities’ financial management reaching crisis levels with only 9 municipalities out of 278 receiving clean audits in 2011-2012 (17 if the 60 municipal entities are added); corruption reaching record levels; the Nkandla and Guptagate controversies that both implicated Zuma; unemployment rates rising to their highest levels; successive economic ratings downgrades by international rating agencies; and more.

Before the Zuma administration took office there were also ample bad news events such as the electricity crisis, the deaths of scores of people in xenophobic violence across the country, former President Thabo Mbeki’s AIDS denialism, and the arms scandal among others.

The sum total of all of this was that the euphoria over the South African “miracle” of 1994 and the feel-good era of Nelson Mandela’s presidency was soon overshadowed by an ever growing litany of negatives. The outlook for South Africa seemed to be ever poorer with investors said to be increasingly giving it a miss in favour of other safer bets.

Positive side

Every coin, however, has a flipside. In South Africa’s case there also is a more positive side. Earlier this month Brand South Africa CEO Miller Matola reminded the National Press Club that recent global reports showed the country in a favourable light.

He cited the World Economic Forum (WEF) Global Competitiveness Report in which South Africa outperformed its BRICS peer nations in 6 of the 12 pillars of competitiveness used by the WEF. Matola said the report categorises South Africa as the most competitive economy in sub-Sahara and observes that the country is in the second stage of development — the efficiency-driven range.

According to the WEF report the five most problematic factors for doing business in South Africa were an inadequately educated workforce, restrictive labour regulations, inefficient government bureaucracy, an inadequate supply of infrastructure, and corruption.

Matola also noted that South Africa had  risen two places from 41st in 2012 to 39th this year in the World Bank’s Doing Business report, while the World Academic Summit Innovation Index — a new indicator — ranked South Africa fourth and the only African country in terms of attracting investments from business for execution in areas of innovation and research.

But some have also been sounding a note of caution about South Africa’s continued competitiveness. Speaking at the Africa Day business networking seminar in Cape Town recently, Wesgro chief executive Nils Flaatten predicted South Africa would come under immense pressure to retain its position as the most competitive African economy given the ease of doing business elsewhere in Africa improving through regulation transparency, and predictable administered prices and labour costs.

SA in international surveys

The above, however, is by far not the full picture. There are a growing number of important international surveys that measure the performance of countries across a wide variety of factors, all of which most certainly will help form the perceptions of investors and other observers. What do these say about South Africa?

World Bank/International Finance Corporation’s Doing Business Report 2013: The latest report ranks South Africa 39^th – well in the top quarter - in this annual survey of the cost and difficulty involved in doing business in 185 economies around the world. South Africa scored particularly well in respect of credit extension, investor protection, payment of taxes, obtaining construction permits, and starting a business. Weaknesses were singled out as cross-border trading, and electricity access. The survey looks at regulations applying to the full life cycle of a business, but does not include variables such as corruption or availability of skills.

Global Competitiveness Index (GCI): As mentioned already, the latest GCI report published by the World Economic Forum in September 2012 ranked South Africa 52 out of 144 countries, placing it well in the top-performing half. It was also ranked the second most competitive country in Africa after Tunisia (32nd), and third among its BRICS peers, beaten only by China (29^th) and Brazil (48^th). However, since 2009 South Africa has slipped back five places.

In the latest survey South Africa scored exceptionally well in respect of factors such as its market size, quality of its institutions, strength of auditing and reporting standards, efficacy of corporate boards , protection of minority shareholders' interests, efficiency of legal framework, intellectual property protection, property rights, judicial independence, its financial market development, regulation of securities exchanges, soundness of banks, availability of financial services, financing through the local equity market, business sophistication, innovation, good scientific research institutions, and strong collaboration between universities and the business sector in innovation.

However, South Africa scored poorly in respect of its labour market efficiency where it was ranked 113th. Despite its economy being the second most competitive on the continent, the country’s pay to productivity ratio is ranked among the worst countries featured in the WEF’s rankings at 134th place. The index is compiled by leading academics and a global network of research institutes from publicly available data and by polling business leaders in 144 economies.

Grant Thornton SA’s Emerging Markets Opportunity Index (EMOI): Published in February this year, the latest EMOI report  ranks South Africa 14th out of 26 countries and the only African country to be ranked in the top 15 worldwide. South Africa is ranked as the leading emerging economy in Africa, place also ahead of Nigeria as a potential investment destination. The index is based on analysis of a variety of indicators from Grant Thornton's International Business Report, the International Monetary Fund and United Nations Human Development Report.

Africa Competitiveness Report: In this 2011 WEF report South Africa scored second place on the African continent and was rated as comparing favourably with innovative countries such as India and Brazil.

The Heritage Foundation’s Economic Freedom Report: The most recent report published in January this year ranked South Africa’s economy 74th out of 177 countries – well in the top half globally and 6^th out of 46 countries in sub-Saharan Africa – as being "moderately free”. The index is published by The Wall Street Journal and US think tank the Heritage Foundation and uses 10 benchmarks to measure the economic success of the 179 countries. These include business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labour freedom. With a score of 61.8 South Africa’s economic freedom score is slightly higher than the world average of 59.6.

Transparency International’s Corruption Perceptions Index (CPI): The CPI measures the perceived levels of public sector corruption in a 176 countries around the world. South Africa was placed 69^th in this November 2012 report, with a score of zero being highly corrupt and 100 being least corrupt. South Africa has slipped several positions in this survey over the last number of years, but is not perceived to be among the most corrupt countries as many commentators would often have us believe .

IT industry Competitiveness Index:  This survey, compiled by the Economist Intelligence Unit, compares the extent to which 66 countries enable a competitive environment for their information technology industries. In the most recent such survey South Africa was placed 47^th, a good ranking but still leaving much room for improvement, especially since slipping back from 37^th position in 2008.

South Africa has also done well in a number of other surveys too, such as the Press Freedom Survey done by Reporters Without Borders which ranked the country a very respectable 52^nd out of 179 countries. But it has slipped back after previously being among the top 50, but government plans to control the media more tightly and laws such as the Protection of State Information Act have had a negative effect. In the Global Gender Gap Index compiled by the World Economic Forum South Africa was ranked 16th out of 135 countries.

While the media’s reporting on a succession of specific negative events, the views of a variety of commentators, and the popular perceptions (sometimes misconceptions) of people in general tend to often present a highly negative picture of South Africa, it is clear that there is another more sober and more positive side to the picture as well. While it has many problems to deal with, South Africa still offers value for money, security and opportunity as an attractive investment destination.