SA has moved two places, up to 47th out of 138 countries, in a survey for the World Economic Forum’s (WEF) Global Competitiveness Index.
This means it will be considered slightly more attractive to investors, which is important as SA relies heavily on capital inflows to fund its large current account deficit.
Despite this cheerful news, the index has revealed a worrying development. Institutions, which have always been a strength for SA, fell back two places to 40 on the rankings, dragged down by low public trust in politicians and favouritism in decisions by government officials.
The quality of institutions is defined by many factors and SA is performing well on some of them, such as property rights, which are well protected, and with relatively more transparency than in other countries, says WEF global competitiveness and risks economist Roberto Crotti.
But he adds that two institutional areas have weakened slightly. "The first is the trust in politicians and the second is security, where fears of terrorism have increased compared to a few years ago."
In the short run, says Crotti, the WEF does not see these trends having a substantial impact on competitiveness. It is possible that they can be reversed next year .
Institutional quality has fallen 11 places since last year, with increased political uncertainty, less transparency and business leaders having less trust in politicians.
The assessment of the judicial system has improved in 2016. One of the most noted cases is the constitutional court judgment that President Jacob Zuma should pay back the money spent on nonsecurity upgrades at his Nkandla home.
But a number of shortcomings may limit SA’s competitiveness, the WEF warns. Infrastructural development has stalled in transport and electricity.
"Infrastructure also needs improvements but very little progress has been made on this front in the past 10 years, especially on energy infrastructure, where the provision of electricity is prone to blackouts and voltage fluctuation," Crotti says.
The country’s competitiveness continues to be hampered by poor health conditions, where SA ranks 133rd out of 138 countries. Child mortality is still high and average life expectancy, at 57 years, is low.
Another area that requires improvement is the labour market, where SA ranks 97th due to lack of flexibility, Crotti says.
Business leaders consider restrictive labour rules to be one of the most problematic factors involved in doing business in SA.
When it comes to laws related to hiring and firing workers, SA is one of the most rigid countries in the world, ranking at 135th. This rigidity is made worse by difficult relations between employers and labour — relations that are often described as confrontational, says the WEF.
Improving labour issues is complex, takes time and requires a significant amount of co-ordination — especially in a country where the unemployment rate is above 25%, Crotti says. "Rigidity is hurting competitiveness, and consequently reduces the possibility to create employment in the longer term.
"Therefore the regulation should be made less restrictive to allow the best allocation of talent in the economy."
Government, business and labour have been holding discussions about implementing reforms in the labour sector, including the introduction of a minimum wage and secret balloting.
BMI Research, a Fitch Group subsidiary, warns that though SA has avoided major strikes in 2016, persistent threats of strike action and an uncertain policy-making environment continue to affect investor sentiment, while high unemployment and elevated household indebtedness will weigh on domestic demand.
On the positive side, SA has improved its use of information and communications technologies compared with 2015, has started to reward talent better and has improved the efficiency of the goods market (especially by becoming more open to foreign investments).
SA also continues to rely on a developed financial market and a stable macroeconomic environment, giving it a competitive edge, Crotti says.
The Global Competitiveness Index is based on 12 pillars: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. SA registered marginal improvements in almost all aspects of competitiveness.
Each of these 12 aspects is measured by combining statistics from international organisations, such as the Unesco, for schools’ enrolment rates, for example, and indicators derived from the WEF’s Executive Opinion Survey.
This survey is administered every year by the WEF, in collaboration with local partner institutes. It gathers business leaders’ opinions on qualitative aspects of competitiveness, such as the soundness of institutions or the quality of the education system.