Political will and coherence would give businesses an injection of confidence

Index shows an improvement, but 77% of executives in manufacturing remain unhappy

The RMB/BER business confidence index (BCI) improved marginally to 33 points in the third quarter, from 27 in the previous quarter. This is a welcome development, but no cause for celebration as it still means two-thirds of business executives remain dissatisfied with prevailing business conditions.

There are a few things that can be done, particularly by the government, to stimulate confidence and help offset the short-term effect of the required fiscal consolidation in the face of a revenue shortfall and overspending relative to the budget.

Business confidence improved in four of the five subsectors — retail, wholesale, manufacturing and new-vehicle dealers — while it moderated among building contractors. Let me single out two subsectors of the BCI that have immediate links to consumers and the energy sector.

Retail saw the biggest improvement in confidence, rising 12 points, but still the level of 32 in the third quarter is uninspiring for investment. Part of the reason is the consumer squeeze, from high interest rates and petrol prices combined with low job growth, to the shift from full-time to part-time jobs in the wake of Covid-19.

Spending data shows expected trends, including a shift from discretionary spending to nondiscretionary spending and a rise in credit. There is also a visible lipstick effect, where consumers cut down on big-ticket items such as property, cars and furniture, and rather spend on clothing, footwear and beauty products.

The other sector worth saying something about is manufacturing, which saw an improvement, albeit to the lowest level of confidence among the four sectors that improved. In this sector 77% of business executives remain unhappy with prevailing business conditions.

Load-shedding is one of the biggest constraints for the manufacturing sector and overall economic growth, even though value added in manufacturing contributed to second-quarter GDP growth of 0.6%. The growth of the manufacturing sector at a time of significant load-shedding implies that the sector has built up some resilience, which is visible in the robust growth in fixed investment in machinery and equipment.

However, increased investment in renewable energy by the private sector has nothing to do with business confidence; it’s a survivalist reflex action to the inability of Eskom to provide sustainable power.

The big point is that there is little to celebrate in this improvement in business confidence. But there are things the government, which creates the operating environment for the private sector, can do to boost business confidence and the prospect of faster growth in private investment.

This is important because a tax revenue shortfall is a foregone conclusion that will leave a significant fiscal deficit, which will eventually make our debt unsustainable. The Treasury has issued guidelines for government departments to cut spending, but we don’t have a history of success in cutting spending a year ahead of or during an election year.

It is hard to believe in a fiscal consolidation driven by spending cuts, even though it’s the most likely to succeed if successfully implemented. In this case the government, which usually bails out state-owned companies, needs bailing out itself, and only the private sector can bail out the government through investing in the economy.

One way for this to happen is for the government to ramp up economic reform — speed up the improvement in the energy availability factor and drive more investment in energy generation to end load-shedding, and fast track reforms in the logistics and water sectors.

There are some signs of movement on dealing with corruption and crime, but we need evidence of this, such as arrests of the senior officials and their private counterparts who are involved in corrupt activities, and more unified and intentional resolve to embark on fiscal consolidation. 

If these reforms are done business confidence will surely rise, and private sector investment could generate economic growth and the taxes required to bail out the state. All of this is possible, but it requires political coherence and will.