27 October 2006

If we don’t have confidence in our country, how can we expect the rest of the world to have confidence in us?

That was the question posed by internationally renowned economist Dr Iraj Abedian to a select audience at Elvey Security Technologies’ recent “breakfast of discovery” at the sumptuous Rosebank Park Hyatt.

Senior economic advisor to the state president Thabo Mbeki, Dr Abedian held the audience riveted with his talk on South Africa’s economic scenario, making particular reference to the private security industry and the challenges currently facing it. A founding director of Pan-African Investment and Research Services, he has been at the forefront of economic policy development in South Africa since the beginning of its transformation. The author of numerous books, he is also an honourary professor of economics at Pretoria University and speaks with the authority of 20 years of study of the South African economy.

While people often tended to take things for granted, he said, it was important to sit back and look at the whole picture. South Africa’s economy was well diversified although the country’s growth had been predominantly in the services sector and agriculture was no longer the backbone of its economy. He then made reference to the growth of the private security industry in recent years, which he attributed partly to escalating crime levels but also driven by the growth and expertise of those in the tertiary sector.

South Africa’s security industry had undoubtedly benefited from the country’s high crime levels, but this would only be beneficial up to a point, he warned. The country had to address its structural imbalance as a matter of urgency – and focus on current inequalities regarding unemployment and income distribution. This problem was the Achilles heel of South African society since poverty was the breeding ground for discontent and crime.

Painting a verbal scenario of possible trends going forward, Dr Abedian said that as global regions continued to integrate, care needed to be exercised regarding the free flow of people and goods over borders. A lack of control here would result in an upswing in the volume of illegal goods coming into the country, making it increasingly easy for criminals to convert dirty money into assets.

Said Dr Abedian: “The problem is compounded when a region integrates faster than its law enforcement capacity, because it becomes more and more difficult to track criminals. This in turn opens the doors for international syndicates to move in.” Warning that perception played a key role when it came to branding a global region “soft”, he said legislation therefore had to be harsh and visible in the media. Integration had to be preceded by appropriate law enforcement and information collation if the result was to be a decrease in the cost of crime in an expanding market.

In terms of cost versus benefit, Dr Abedian said that right now the country’s business sector and its higher income groups were the predominant users of the private security industry. But, he added, if crime went beyond a certain level, the security sector would start being seen as ineffective with the result that its customer base would then start to deplete.

The country therefore needed to be aware of and proactive about what he termed its “clear and present challenges”. For him, major issues included:

  • Focusing on the implementation of policy and projects
  • Government infrastructure spending
  • The 2010 FIFA World Cup – this he felt was a bit of a saviour because the country and the government were in the global eye - effectively put it on notice to resolve its problems
  • Careful monetary policy reaction to world events
  • Political uncertainties – these had to be dealt with sooner than later
  • Safety and crime control – these were the government’s top priorities or South Africa would suffer
  • There needed to be a drive to get back to 6 percent GDP growth which he felt was the magic number that would allow the country to deal with its infrastructural issues
  • And last but not least, Dr Abedian urged the private security industry to work closely with the police which would help bring crime under control

On a broader basis, Dr Abedian said business and consumer confidence in the economy were at record highs – and the emergence and sustainability of this confidence was something that citizens needed to get used to after the country’s long history of economic uncertainty. South Africa’s sovereign risk versus its currency risk was declining, with the result that the borrowing rate was down. As one of the world’s top emerging economies – in a matter of a just a decade – the government was now in a position to borrow money at nearly one fifth of its former premium, he said, adding that it was now seen as a country with a more stable future, and the accompanying confidence was a telling indicator of how the global market regarded it. In 1994, South Africa was not a coveted investment destination, but the success of the country’s new economic policy had resulted in its improved risk rating, which in turn had lowered its cost of borrowing.

While there was no doubt that the country’s weakening currency, together with the impact of the price of oil, remained a major inflation driver, this was not nearly the end of the story for him. The government’s prudent macro policy had ensured that its finances were in a healthy position which made borrowing easy. The problem, he said, was not a lack of willingness on its part to pursue this route but rather that the government lacked the capacity to deliver right now.

Commenting on South Africa’s household debt which he said was at a record high, Dr Abedian said that people’s incomes and their ability to earn meant that they could still service their debt. And for him, consolidating debt was definitely the route to go, provided the funding mechanism was used wisely and not for parties or fancy cars.

From a property perspective, he confirmed that house prices were also at record highs – which he felt was good from an economic point of view since the country’s assets had long been undervalued by global standards. Predicting that prices would continue to rise for the next five or six years, with a few exceptions, Dr Abedian said property ownership was an important asset class in terms of stability and predictability.

Manufacturing and exports should be higher, he felt, but output was currently hampered by a lack of skills. This was exacerbated by the fact that South Africa had lost 20 years of investment and infrastructural development during the 70s and 80s. Transformation, when it came about, again diverted time and funds away from development in this sector, leaving the country with a below-standard infrastructure and limited developmental progress owing to a lack of capacity. The result was that despite the current commodity boom, the country was exporting five to six times less than it could and should be doing. To underpin his assertion, Dr Abedian noted the number of skyscrapers on track to be built in China over the next few years. On completion, this would translate to the country tripling its existing number of skyscrapers. Incidentally, the spin-off from this wave of development would create huge demand for building products such as cement and steel, he said, which made it important for South Africa to think globally and for its business sector to start taking itself seriously.

Elvey Marketing