Uncertainty over radical economic transformation ‘slow poison’ for investor confidence

Recent changes in government policy are driving a sharp decline in uncertainty among investors‚ an index published by North West University (NWU) shows.

The NWU School of Business and Governance on Thursday released the Policy Uncertainty Index (PUI) for the first quarter of 2017 – and according to Professor Raymond Parsons‚ recent political events have given caused the sharpest single increase in the index since its inception in 2015.

Further uncertainty over the newly adopted term “radical economic transformation” was “slow poison” for investor confidence‚ according to another NWU professor‚ Waldo Krugell‚ who helped Parsons establish the index.

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The PUI for January to March 2017 increased to 51 from 38.8 for the final quarter of 2016.

The index‚ Parsons explained‚ is the outcome of positive and negative factors influencing the perceptions of policy uncertainty – based on three pillars: media data‚ specifically articles mentioning policy uncertainty‚ a survey taken by economists from around the world and figures from the Bureau of Economic Research at the University of Stellenbosch on the number of manufacturers who indicated they believed politics was a constraint on business.

At a media briefing in Rosebank‚ Parsons and Krugell explained the PUI was based on similar indices in other countries such as the United States.

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“We drew from those indices and adapted ours to better suit South Africa‚” said Parsons.

“The results for the first quarter of 2017 show an average index score of 51‚ reflecting a sharp rise over the PUI of 38.8 of the last quarter of 2016‚” he said.

This figure puts the PUI‚ which works on a base line of 50 points‚ back in negative territory for the first time since September 2016.

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From its base of 50‚ the PUI spiked to 55.4 in Q4 of 2015 as a result of “Nenegate”‚ when President Jacob Zuma suddenly fired then Finance Minister Nhlanhla Nene. It then dropped slightly to 53.1 in Q1 of 2016 after Pravin Gordhan’s budget speech. It dropped further to 52.5 in Q2 after Gordhan managed to steer the ship clear of credit rating downgrades and continued to drop further to 46.5 after Gordhan presented his mid-term budget in Q3 and avoided a further ratings downgrade‚ dropping it to a low of 38.8 in Q4.

Parsons went over some of the factors that have influenced policy uncertainty in 2017 so far‚ such as a global economic outlook‚ the national budget and the ANC policy document released ahead of their December national conference and of course‚ the economic impact of political decisions such as the cabinet reshuffle and the subsequent credit ratings downgrade.

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“The latest sharp spike in the PUI is closely linked to the downside risks created by the cabinet reshuffle and its likely economic consequences‚ both short and long term‚” he said.

“Whether we like it or not‚ the economy is entering rough seas.”

Parsons said it was still too early to say whether there would be a recession‚ but uncertainty over policy and the resulting ‘wait and see’ attitude from investors would be very expensive for South Africa.

Krugell meanwhile‚ responding to a question from reporters‚ said the term ‘radical economic transformation’ was mentioned in conjunction with uncertainty often.

“No one really knows what is being referred to when you throw around those terms. It also depends on who is talking at the time. It is mentioned in conjunction with land reform‚ it is also mentioned in conjunction with nationalisation of mines and banks.

“Throwing the term around every now and then if you are in government it makes investors nervous‚ because they don’t know what you mean when some minister says and ‘by the way we still need to have this radical economic transformation as well’‚ they immediately think should I now make a fixed term investment? Is that under threat? That really is a slow poison from the view of investors‚” Krugell said.

Parsons added that the ANC policy document was full of references to the National Development Plan‚ but the problem was where the debate around radical economic transformation fitted in.

“We look for evidence that it is being implemented consistently and what does this new debate mean for commitments. It adds to uncertainty at this point and really‚ cries out for more clarification.”

TMG Digital/TimesLIVE