By John Greenwood, Chief Economist on May 4, 2018, in Market & Economic
Can President Ramaphosa make the tough policy decisions needed to spur economic growth?
Volumes have been written about the scandal-tainted regime of former South African President Jacob Zuma. Since becoming leader of the country in 2009, Zuma was dogged by allegations of corruption, nepotism and poor personal judgement, and national prosecutors recently reinstated corruption charges against him. With his recent resignation and the ascension of new president, Cyril Ramaphosa, in February, international and domestic sentiment toward the country (and its economy) has improved dramatically. However, South Africa faces significant economic challenges. To reverse the declining trajectory of the economy, I believe a number of tough policy choices are needed:
- The state-owned enterprise sector needs to be restructured.
- The large size and cost of government should be reduced.
- Labor market reform is needed to combat chronically high unemployment.
- South Africa must become more attractive and friendly to foreign investment.
Issues to watch for investors
During his inaugural State of the Nation address earlier this year, Ramaphosa offered a number of proposals on several hot-button topics. Some were very encouraging to investors, while others raised concerns about their potential impact on the economy. Among them:
State-owned enterprises (SOEs). On the positive side, the president proposed a review of the funding model for SOEs. This sector has long been an underperformer that relies on government support, often in the form of explicit guarantees (approximately 6.4% of gross domestic product (GDP) in 2017, according to the South African National Treasury).
Many SOEs act as vehicles to support targeted economic development, but governance failures due to weak accountability, excessive politicization and unclear objectives have hindered their effectiveness. Bureaucratic bloat is also an issue - currently, about 35% of government expenditures are for salaries. In my view, the first steps in
