Anorexic economy threatens black empowerment
- Author: Andile Ntingi
- Published: Monday, 18 July 2016 08:17
Efforts to nudge black investors to successfully ride a third wave of black economic empowerment (BEE) could come to naught if South Africa’s prolonged anorexic economic growth persists into the unforeseeable future.
Last year, the government introduced a regimen of strict empowerment laws that seek to speed up implementation of the policy by equitably transferring wealth from white capitalists into black hands through placing heavy emphasis on integrating black companies into lucrative industry supply chains, rather than merely encouraging white companies to sell minority equity stakes to black investors.
The first two waves of BEE dating back from 1994 to 2013 only enriched a tiny politically connected black elite, but these investors have taken a knock since the recession that ravaged the global economy in 2008 and 2009 – the worst economic slump since the Great Depression in the 1930s.
The world economy is still suffering from the recession’s hangover and South Africa, which is mainly a commodities exporter, has also been unable to shake off its after-effects.
According to capital markets research firm Intellidex, companies listed on the Johannesburg Stock Exchange (JSE) had by last year concluded R371 billion worth of BEE transactions since 2000. Intellidex also revealed that during this period BEE deals valued at R196 billion – representing 62% of the R371 billion – were clinched by strategic investment partners, who in the context of South Africa are usually linked to the ruling political elite or powerful commercial interests.
Prior to the global economic crisis, many BEE deals were in the money, thanks to a rally on the JSE and strong economic growth. That growth was spearheaded by household consumption expenditure, which makes up 60% of South Africa’s gross domestic product (GDP). Consumers were spending freely, taking advantage of low interest rates to buy high-end fashion brands, cars, and residential property. At the same time, South Africa benefitted from more than a decade-long commodities boom, which made black mining moguls extremely wealthy.
Between 2004 and 2008, the economy expanded by an annual average of 4.9%, helping to lift employment by almost 2 million to 13.6 million in September 2007 from 11.7 million in September 2001.
The JSE All-Share Index more than trebled to 32,907 points from a low of 7,492 between 24 April 2003 and 21 May 2008. During this bull market run, black investors not only enjoyed share price gains on their investment portfolios, but they were also getting healthy dividends that enabled them repay debt incurred when they bought the shares from JSE-listed companies. Debt-servicing was also affordable due a barrage of interest rate cuts by the Reserve Bank between June 2003 and April 2005. The Reserve Bank’s repo rate fell by a cumulative 650 basis points from a high of 13.5% to a low of 7%, forcing commercial banks to also slash prime lending rates.
South Africa’s economic boom before the global recession and a slump during and after the recession is akin to the biblical story of seven fat years, which was immediately followed by seven lean years. The lean spell continues seven years after the recession struck and there is no end in sight.
SA has experienced seven lean years after recession
Ajay Lalu, BEE subject matter expert at Black Lite Consulting, argues that most BEE deals are now under water and they are unlikely to emerge due to current low economic growth and high interest rates that make it hard for BEE investors to pay off their debts. This situation is exacerbated when companies they invested in are forced to hold onto cash instead of paying dividends, adding salt to BEE investors’ wounds.
Some BEE companies are also negatively impacted by the extreme volatility in South Africa’s exchange rate. These are BEE investors who had borrowed from offshore markets to finance their transactions and are now feeling the impact of the weak rand, which has depreciated sharply against a basket of hard currencies such as the U.S. dollar, British Pound, the euro, and the Japanese yen.
Lalu says what South Africa needs now are high growth, lower interest rates, and a stable exchange rate.
“In my view, a number of BEE deals have been negatively impacted by the global economic crisis. We need to create an environment that is conducive to growth, which allows the economy to grow at 5% or 6% in order to really empower black companies and black people,” explains Lalu.
After struggling to record a meaningful recovery since contracting by 1.5% in 2009, where 1 million jobs were lost, the economy has over the past two years been barely scraping through. In 2014 and 2015 it grew by 1.5% and 1.3% respectively, a far cry from the 5.4% growth achieved in 2007.
“If there is no growth, this means that those that benefitted in the first 15 years of BEE implementation are suffering. Those aspiring to be the next group that benefits from BEE will be frustrated”
The economic performance has worsened this year. In the first quarter of 2016, the economy contracted by 1.2% after expanding 0.4% in the last quarter of last year. Growth forecasts by the Industrial Development Corporation (IDC) paint a grim picture of poor economic performance all the way to 2020. The IDC expects the economy to grow by 1.2% next year and 2.8% in 2020.
Ordinary South Africans are not only faced with a job-shedding, stagnant economy, but are also grappling with escalating inflation, which is being driven higher by the weak rand, rising food prices, electricity tariff hikes, and transport costs. The economy is suffering from the dreaded stagflation, which is difficult to treat because cutting interest rates to stimulate spending fuels inflation while hiking interest rates to quell inflation hurts economic growth.
The Reserve Bank has opted to dealing with the inflation element of stagflation as a result of consumer inflation spiralling out of its 3% to 6% inflation target. It has been hiking interest rates, hurting the economy already reeling from weak demand of South Africa’s commodities by foreign customers. The IDC is forecasting inflation staying above the upper end of the inflation target this year and next year, implying that interest rates are unlikely to fall anytime soon to boost spending and investment.
Dr Iraj Abedian, the chief executive of Pan-African Capital Holdings, says the economy needs to grow at more than 5% on a sustainable basis for 15 to 20 years if the benefits of BEE are to be fully felt and for its fruits to cascade down to the broader black South African population.
Right now, the economy is unable to surge forward because it is starved of investment as investors have pulled back. The corporate sector is said to be sitting on piles of cash with estimates ranging between R500 billion and R1 trillion of money they are speculated to be hoarding.
“Growth does not happen in a vacuum. If you do not attract medium- to long-term investment, your GDP will not grow,” explains Abedian.
Part of the obstacle to attracting investment into South Africa, according to Abedian, was poor governance, corruption, and policy uncertainty, which makes investors nervous to put money into a country that has a track record of poor economic growth performance and small domestic consumer market.
Low growth is bound to have a knock-on effect on black empowerment.
“If there is no growth, this means that those that benefitted in the first 15 years of BEE implementation are suffering. Those aspiring to be the next group that benefits from BEE will be frustrated,” Abedian argues.