Deceptively simple ways SA can boost investor sentiment

Source: Fin 24, 14/07/2018

Dutch football legend Johan Cruyff famously said: `Football is a
simple game. It is just very hard to play it simple.`
The same rings true for President Cyril Ramaphosa’s plan to bolster
investment in South Africa.[1] The president’s seemingly simple goal
is made much harder by the country’s business environment, which has
been deteriorating in recent years.
Ramaphosa can, however, implement a handful of measures to boost the
country’s standing among investors.
Decline
Leading economic indices empirically demonstrate how the local economy
is today less competitive �` relative to others �` than it was only a
few years ago. Many emerging market peers (including some African
states) are now ranked higher than South Africa, whereas in the early
and mid-2000s the country was a leading performer on the emerging
market stage. The hopeful, albeit waning aura around Ramaphosa is not
enough to bolster sustainably the country’s image, or to loosen
domestic and foreign investors’ purse strings.
Global indices, which measure different facets of countries’ business
environments, show South Africa’s decline from 2014 to 2018:
• The World Bank’s Doing Business index: South Africa plunged from 41
to 82. Botswana, Kenya, Mauritius and Rwanda are better positioned on
the 190-country index, which sees a large set of subject matter
experts rank economies according to the conduciveness of the regularly
environment to starting and operating a business.
• The World Economic Forum’s (WEF) Global Competitiveness Index: South
Africa slipped from 53 to 61, out of 137 economies. Mauritius, Rwanda
and an array of other emerging markets are better placed. The WEF
measures competitiveness by a quantitative and qualitative
investigation of institutions, policies, and factors that determine
the level of productivity of an economy.
• Index of Economic Freedom: A smaller drop from 75 to 77 in this
index, run by the influential US-based think tank, The Heritage
Foundation, and The Wall Street Journal. Botswana, Mauritius and
Rwanda ranked much better. The index measures four economic aspects
over which governments exercise control: rule of law, bureaucratic
size, regulatory efficiency, and market openness.
• World Competitiveness Rankings: South Africa dropped from 52 to 53
in the Swiss-based IMD’s 63 country index.] No other African country
is included, but emerging economies including India, Mexico, the
Philippines, Thailand and Turkey all perform better. The IMD measures
competitiveness by comparing countries’ infrastructure, institutions
and policies that encourage value creation by companies.
• A.T Kearney FDI Confidence Index: South Africa dropped out of the
index but was 13 out of 25 in 2014. Brazil, India and Mexico
consistently make the list. The index is drawn from an annual survey
of global executives who rate which markets are likely to attract
foreign direct investment (FDI) over the next three years. It is a
lead indicator and has over the past two decades closely tracked the
top receivers of FDI in later ears.
Perception is reality
Observers who may dismiss these findings as `mere opinion` or an
`academic exercise` fail to appreciate that perception often is
reality. These snapshots provide a global benchmark that help shape a
country’s international narrative; investors’ views �` just like those
of everyone else �` are shaped by imperfect and incomplete information.
South Africa’s declining rankings, coupled with international
publications’ unfavourable media coverage (some more balanced than
others), portray a country in decline.
There are strong suggestions that this narrative has real-world
consequences. As economist Mike Schüssler pointed out, negative net
FDI accompanied South Africa’s drop in the rankings. In other words,
since 2014, more South African firms invested offshore than foreign
firms invested locally.
None so blind…
Trite as it may sound, South Africa jockeys for investment in a
competitive international market. Foreign and domestic companies often
make investment decisions based on the relative attractiveness of one
destination versus another. It is incumbent on each country to present
a compelling case for investment. Firms, especially those based
offshore, tend to have little sympathy for socio-economic challenges
and historic injustices, remaining focused on generating maximum
profit at minimum risk.
As cold and calculating as this stance may be, it provides countries �`
at least those that care to listen �` with a relatively simple roadmap
to attract investment. For the last several years, South Africa has
not walked on this path, and local and foreign firms have reacted in kind.
SA’s next steps
Where, then, does this leave South Africa? Disheartening as these
findings are, it is encouraging that Ramaphosa �` unlike his
predecessor �` acknowledges the decline and has taken initial steps to
reverse it. This includes courting wealthy nations, where the bulk of
FDI originates, and reforming state-owned enterprises and arms of
government e.g. South African Revenue Service.
As mentioned previously, however, it will require a concerted
multi-stakeholder effort over an extended period to address the
deep-seated constraints on the country’s investment environment. There
is no silver bullet to restore investor trust. Building a positive
reputation takes time; so does rebuilding it. In the meantime, the
presidency should redouble its focus on low-hanging fruit to improve
South Africa’s battered image.
Ramaphosa should focus on issues that are nominally under his direct
control. He would do well to heed a World Bank study that found a
country’s investment climate (e.g. investor-friendly policy,
regulation and bureaucratic efficiency) appeared to be a leading
driver of FDI, preceded only by market size and potential growth.
This hints at why states such as Mauritius and Rwanda, with small
economies, could bolster FDI inflows by providing an attractive
environment. South Africa’s one-stop shops, which are being rolled-out
to facilitate investment, is a positive step in this direction. The
presidency should go further and review all macro-level policy and
regulations to ensure it encourages �` or at least does not discourage
�` investment. There can be no sacred cows in such a process.
Pretoria needs to employ a marketing strategy that highlights the
country’s unique value proposition and clearly differentiates it from
other emerging markets. In the past, for instance, South Africa was
positioned as the gateway to the rest of Africa, a hub from which
firms could enter the world’s second fastest growing region.
Importantly, government should be seen to be improving the business
environment. While the presidency may be taking measures to shift
investor perceptions, too little information filters through to the
public realm too infrequently. Investor’s perceptions will improve
faster if government openly and unequivocally espouses pro-business
plans and actions on all public platforms �` not just the usual
investment junkets and foreign trips. Communication should be managed
centrally from the Union Buildings to ensure consistent and credible
messaging, properly contextualising South Africa’s contentious policy
debates. Special attention should be given to issues that investors
have flagged as concerns, including land reform, the mining charter,
national health insurance and free higher education.
There may be not be any quick fixes to South Africa’s investment
challenge, but neither are the solutions a complete mystery. It will
require political will to present companies with a predictable,
competitive environment and a compelling business case for why
investing now will maximise profits later.
With simple measures in place, the process of regaining investor
confidence can and will occur �` similarly to Ernest Hemingway’s
description of going bankrupt �` gradually, then suddenly. As long as
Pretoria guard’s against scoring any more own goals.