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'Sweeping reform' the only way, Swiss tell SA
Structural changes and investment-friendly policies are advocated for economic growth, writes MARCIA KLEIN
UBS, which was partly responsible for starting the run on the rand last year with its report that the currency was overvalued, has researched 50 emerging market countries, including Croatia, Hong Kong, India, Pakistan, Taiwan, Vietnam and Zimbabwe. Its latest report says: "While the country's ability to achieve growth of 6% by 2000 is debatable, it is reasonable to expect higher growth rates in the years ahead as a result of an improving policy environment, a more open economy and greater political stability." But growth could be hampered by the legacy of the past, the cost of the transition process, crime and the flight of skills. The reports says emerging markets have been growing at about 6% a year for the last 10 years - considerably faster than traditional industrial economies which have grown at about 3%. They have received sizeable net capital inflows and many have witnessed rapid financial market development. The growth differential with the rest of the world has entailed "dramatic" shifts in world output, with emerging markets' share of world output growing rapidly to half of global GDP. Most have lowered inflation and improved their public finances but have widening current account deficits, increasing the need for foreign capital. UBS says sub-Saharan Africa "has been the only continent which has not yet shared in the growth of the 1990s, and this is unlikely to change in the near future". But South Africa has better prospects - although its recent economic reforms "have not been particularly noteworthy in an international context" and it lags behind other emerging markets in terms of the adoption of liberalisation measures.
Tough foreign exchange restrictions, no major privatisation drive and a rigid labour market "are reminiscent of Britain in the 1970s", the report says. These, together with crime and political uncertainties, are obstacles to investment in the medium term. But the government has reduced import tariffs faster than required by GATT, and has committed itself to privatisation and equity partnerships and to a budget deficit of 3% of GDP by 1999. South Africa's savings rate of 17% is at a record low, but the macro-economic strategy aims to cut government's dissavings and boost the level of private savings to push the overall savings rate closer to 22%. Even with a savings rate of 22%, the country will require capital inflows equivalent to about 2%-3% of GDP to finance the shortfall in its projected investment requirements. "This has been the country's Achilles heel for much of the last decade," the report says. At about 24% of GDP in 1995, South Africa's level of foreign indebtedness "compares very favourably with many other emerging market countries", meaning that given the right macro-economic framework, SA foreign borrowings could be increased. ý A report commissioned by international communications company Burson-Marsteller says Russia is widely tipped to be the best performing emerging market in 1997. It says apart from South Africa, markets in sub-Saharan Africa "remain of little interest to most institutions". Investors see corporate governance, shareholder value and the rights of minority shareholders as a low priority for emerging markets. The report says most global investors are cautiously optimistic about South Africa's equity markets and economy. But cross-shareholdings and tight exchange controls "remain the major obstacle". Relatively low growth rates also thwart investment. Crime is seen to hamper direct, not portfolio, investment.
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