Home » SA’s economy has a small window of opportunity to bounce back and rebuild

SA’s economy has a small window of opportunity to bounce back and rebuild

by Justin

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South Africa has a limited window of opportunity to reset the economy and build a stronger base for sustained long-term growth. Seizing it will require rebuilding business and investor confidence by moving swiftly to implementation of the economic reforms outlined in Minister of Finance Enoch Godongwana’s 2022 Budget speech.

The window “has been created and remains open” due to the positive effects on the South African economy of global stimulus injected into the markets to combat the economic effects of the Covid-19 pandemic, says University of Stellenbosch Business School guest lecturer Jason Hamilton.

“The revenue windfall from a mining commodities boom that had enabled Godongwana to extend the social relief grant, cut corporate tax and reduce the budget deficit would likely remain over the medium-term, but he cautioned that the window of opportunity would only be “open for about the next three years,” says Hamilton.

“Thus the focus on building confidence is critical. Reform proposals are to be welcomed, but they must move swiftly to enactment and implementation, efficiently and effectively across the board, coupled with intensifying the fight against corruption in both the public and private sector,” he adds.

Recovery still fragile

Meanwhile, for business to take advantage of the opportunity window would require a focus on debt reduction strategies, agility and preparedness for uncertainty, reviewing business models, and entrenching the rapid technology adoption forced by the pandemic into business strategy for competitive advantage, comments Hamilton.

While the country had experienced a “healthy and strong bounce back” from the economic contraction of 2020, Hamilton said recovery remained fragile, indicated by the downward revision of the expected 2021 GDP growth rate to below 5%.

South Africa’s medium-term GDP growth is projected at 2.1% for 2022, reducing to 1.6% and 1.7% for 2023 and 2024, while the International Monetary Fund (IMF) projects the global growth rate at 4.4% and 3.8% for 2022 and 2023, and 3.7% and 4% for sub-Saharan Africa.

“This context is a clear sign that, although we have seen a bounce back, a recovery and to some extent a rebuild, it is not near the strong recovery hoped for, as seen in other markets,” Hamilton says.

Covid-related repercussions to remain a challenge

He adds that the relatively low rate of Covid-19 vaccinations, with the threat of further waves and the potential of further restrictions on the economy, was likely to remain a challenge deep into 2022.

“This has a direct impact on consumer and investor confidence, further impacted by the challenges of the SOE’s and specifically the ability of Eskom to supply electricity. This uncertainty remains over the medium term while some of the reforms proposed as well as renewable energy projects are brought online.”

In the global context, South Africa is impacted by the slowing pace of recovery as many countries have started pulling back on stimulus packages, compounded by continued supply chain disruptions and a rising inflationary environment, this further exasperated by the geopolitical challenges and uncertainty faced.

“Despite these challenges, South Africa is the most industrialised nation on the continent, has a well-capitalised and regulated financial sector and there remains a window of opportunity to reset and build a better base to support long term sustained growth,” Hamilton says.

Considering the precarious nature of the global and local economies and their related recoveries, within the context of the challenges that lie ahead, Hamilton makes recommendations for where business owners should be focusing in 2022.

1          Debt reduction

Strong GDP growth in 2021 enabled many companies to not only reduce net debt exposure but also build up cash reserves, placing them in a strong position of resilience to deal with future shocks and also to take advantage of opportunities.

However, Hamilton says both public and private sector debt levels remain significantly elevated as companies emerge from the effects of the Covid-19 pandemic. These companies would need to prioritise debt reduction strategies, both from a structural and affordability point of view, in order to ensure sustainability.

2          Mergers & acquisitions

“Globally, M&A activity has hit records levels over the last two years, in almost all markets, and this trend is set to remain for 2022 as companies rationalise operations by selling unprofitable or non-core assets, applying the proceeds to settle or reduce debt.

“This strategy is something that all businesses need to consider, from SME’s to large and listed corporates, to ensure they are and remain flexible and hence structurally sound, with a healthy core business.”

For businesses emerging from the pandemic with healthy balance sheets, M&A can build out or reinforce their capabilities and thus secure competitive advantage, but Hamilton warns that M&A comes with complexities and companies would need to develop an organisation-wide M&A capability to increase the likelihood of success.

3          Business models

“Business owners across the spectrum have learnt from the pandemic to ensure they remain vigilant and are prepared for shocks. The impact of the pandemic and new challenges faced during 2020 and 2021 mean that companies cannot trade and be managed as before; a new and different approach is required.”

Hamilton says the ongoing global supply chain disruptions since 2020 indicated that the best practice of the past, focused on efficiency and just-in-time systems, needed to shift to a focus on robustness and sustainability.

“We have seen how truly connected the world and the markets are, and that our connection and reliance on our supply chain goes much further than just direct relationships but requires a much more in-depth understanding of the ecosystem.

“This applies beyond supply chains into the business model itself. Corporate governance requires a rework of the risk matrix and application of integrated thinking across the business to review and adapt business models to an ever-changing and dynamic environment.

“The emerging ecosystem approach to markets and business models calls for companies to focus on agility and connectedness, in terms of both customer and competitor perspectives.”

Hamilton says that business leadership and employees need to develop the ability to be agile, to adapt and change, supported by an organisational culture that enables the business to do so in a strategic manner and on a sustainable basis.

4          Technology

The pandemic forced many companies to rapidly adopt new technology and automation in order to continue their operations.

“Now it is time to take a step back and do careful planning for a true digital, innovation and technology strategy aligned to the business model, that enables the company’s specific capabilities and competencies to deliver competitive advantage in serving customers and outperforming competitors,” Hamilton says.

5          Focus on the long-term

“Leadership must remain focused on the long-term horizon, looking 5 to 10 years out, to ensure the business is being built to be best positioned to take advantage of the opportunities and challenges ahead. The short-term forecast will change and flex, but keeping a focus on the longer-term horizon, the trends and trajectory, can help leadership remained focussed and see the short- and medium-term volatility in context.”

 

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