The continued slide in the South African economy can largely be attributed to persistent and significant infrastructure constraints, with the most broadly felt being the lack of sufficient and reliable power supply to fuel higher levels of growth, according to Nicola Weimar, senior economist at Nedbank.
President Jacob Zuma’s recent State of the Nation speech highlighted the urgent need to address energy security, with the soon-to-be-formed Energy Security Cabinet Sub-committee tasked to address all activities in the energy sector.
However, while there is an urgent need to address the issue of energy supply in South Africa, a lack of capacity in a number of other forms of economic infrastructure, from insufficient road, rail, port, communications and other logistical infrastructure, have also proven hugely damaging for the economy.
A consequence of these infrastructure constraints is that the cost of production has been driven higher, contributing in part to a loss of international competitiveness among local producers and exporters, restricting fixed investment by private companies, says Weimar.
The South African Reserve Bank estimated that with our current economic infrastructure, the economy’s potential for growth is probably capped at around 3.5 percent, which is clearly insufficient if we are to adequately address unemployment, inequality or widespread poverty.
Furthermore, the prioritisation of key strategic infrastructure projects will undoubtedly have a much-needed positive impact on foreign perceptions of risk in South Africa.
Weimar points out that the unfortunate reality is that general foreign investor sentiment towards South Africa has deteriorated, which was most recently demonstrated by the downward adjustment of sovereign ratings by Fitch and Standard & Poor’s.
Frequent and devastating labour conflicts, combined with continued strained power capacity, have added to the disquiet, by continuing to generate large current deficits.
Volatile foreign capital inflows into the local equity and bond markets, combined with the pressure on the currency since the final quarter of 2013 and into 2014, have shown that investors are growing increasingly concerned about the country’s stagnating economy.
Speedy and cost-effective delivery on infrastructure will enable the private sector to expand capacity, employ more people and produce more goods and services, therefore creating a larger taxpayer base, which will help to reduce the fiscal deficit and allow for more room to deliver on key social services.
Of course, once a nation manages to unlock faster growth rates, it brings about a virtuous circle. The boost in confidence helps to generate faster and more broadly-spread economic growth which furthermore attracts foreign direct investment.
Government’s National Infrastructure Plan, if effectively and timeously implemented, is a critical step forward for South Africa to improve foreign perceptions of risk, while providing the desperate fuel needed to ignite the economy, she adds.