Trends for entrepreneurs to look out for in 2017

by Trudi Makhaya, Consulting Economist for Mercantile Bank 0

In 2017, an economic climate more conducive to entrepreneurship will prevail, though tinged by uncertainty on the local and international front. Here are some of the trends to look out for:

ECONOMY

Structural reforms to get the economy back on track

1. In our previous annual trend report, we predicted that 2016 would be the year where South Africa’s macro-economic stability would come into sharp focus. Indeed, this was the case on the fiscal and monetary policy front. The National Treasury navigated a tough balancing act of increased spending pressures amidst a slow-growth economy. The Reserve Bank raised the repo rate twice before holding it steady at seven percent for the rest of the year, as inflation risks abated and the central bank was careful not to burden a weak economy with interest rate hikes. The country’s performance was convincing enough that it managed to escape a sovereign credit rating downgrade.

2. Nonetheless, the engines of growth remain stalled. In 2017, investors, entrepreneurs and ordinary citizens will expect to see tangible improvements to the economy. There is broad agreement that the structure of the South African economy prohibits fast and inclusive growth. Analysis by government departments, international bodies such as the World Bank and the IMF and private sector bodies all converge on one key theme, namely the need for structural reforms to boost confidence and reboot economic activity. That means government policies, supported by private sector action that will unlock productivity and lower barriers to entry into the formal economy. There is some debate as to what the ideal policy package will be, but the set includes:

  • restructuring state-owned enterprises to improve their governance and performance
  • encouraging private sector employment to bring in the unemployed, especially the youth, into the labour market
  • improving relations between employers and employees, especially organised labour
  • rooting out anti-competitive behaviour by dominant companies
  • trimming the regulatory burden on business
  • improving the efficiency of government services and infrastructure that supports business development
  • resolving policy and legislative impasses in sectors such as mining and telecommunication

3. The government has committed to implementing measures such as these, and 2017 will be the year when this is tested. Much of government action will be geared towards maintaining an investment grade sovereign rating. Tougher competition in politics (as demonstrated by the outcomes of last year’s local government elections) might inspire some constructive moves by government. But this will be counter-balanced by pre-occupation with the leadership contest in the ANC, which may distract key leaders and policymakers, and also spill into policy debates.

4. Once again, the budget will be a balancing act, with new taxes to boost revenues. Increases in VAT or a tax on asset holdings are still possible; as will tracking down illicit flows of money out of the country. It’s clear that mega-projects such as NHI and the nuclear build have been paused or trimmed, but we cannot rule out surprises on this front. Monetary policy will be neutral, with a bias towards holding interest rates steady, but any acceleration in the pace of interest rate hikes in the United States will force the Reserve Bank’s hand.

5. Relations between government and business will improve through the joint actions announced last year, but we expect implementation to be relatively slow in 2017. The economic climate remains challenging for entrepreneurs. 

BUSINESS

Measures to improve the entrepreneurial ecosystem & entrepreneurs in the classroom

1. As part of the measures announced last year by government, business and labour to ward off a sovereign credit rating downgrade, a new funding vehicle is to be launched to strengthen the funding ecosystem for high potential entrepreneurs. The vehicle, whose details are yet to be spelt out, will see business, mostly blue-chip companies, commit R1.5 billion to financing entrepreneurs and high-growth small and medium enterprises. This will be done indirectly, through accredited fund and investment managers.

2. The fund has identified market failures that hamper entrepreneurship as the following: limited funding for early stage ventures, lack of access to high quality mentorship by entrepreneurs and working capital constraints due to late payments. These are well-known challenges that plague new business formation in South Africa. This new entrepreneurship development vehicle is business-led, with well-known business founders Adrian Gore of Discovery and Brian Joffe of Bidvest taking the lead. It will tap into the skills and capabilities of established businesses to provide not just finance but also guidance and mentorship to new start-ups. Government has also pledged to match the contributions by the business sector. This promises to inject new life into the start-up and small business scene in 2017 and beyond.

3. Other elements of the entrepreneurial ecosystem will also be enriched in 2017 as business owners, innovators and creatives turn to co-working spaces, private clubs and incubators to nurture their ventures. South African entrepreneurs have also been looking globally for mentorship and funding, taking ‘field trips’ to Silicon Valley and raising finance from international venture capitalists. This bodes well for high-potential entrepreneurship, though the rates of new business formation and success remain modest. 

4. Amongst the social challenges facing South Africa, the quality of education ranks quite high. In recent years, the private sector has slowly inched into this terrain, and in 2017, some initiatives will take off or accelerate. Some of these start-ups will occupy the space left by the largely high-end and establish player Advtech. Some are further along down the road – Curro is the well-known but still exciting growth story. Newcomer Spark Schools, playing in the primary school end, received an injection of funding from the Omidyar Network last year and is set to go on an expansion drive. Pioneer Academies continues to open new primary and secondary schools in South Africa and is active in East Africa. Former First Rand CEO Sizwe Nxasana, with co-founder Dr Judy Dlamini, is rolling out the Future Nations schools, which aim to ‘spearhead the African education revolution’ by providing high quality, technology-enabled education.

5. Leading South African company Naspers is also pursuing the opportunity in education, and through Naspers Ventures, is making investments in education technology globally. It has backed Brainly, a collaborative platform for high school students to tutor one another. Other investments include Udemy, an open, online course platform and Code Academy, an online site to learn some basic coding languages. Naspers Ventures believes that in the next few years, technology will transform education radically.

6. Entrepreneurs will also tackle other social services, such as healthcare. These forays demonstrate the opportunity in entering areas that once were mostly left to governments. Entrepreneurs have to tread carefully here, as they are also taking on the ethical obligations that are expected of ‘public goods’. 

GLOBAL

Geo-political risk in unlikely places

1. What were once thought of as safe, stable democracies underpinned by strong, advanced economies will see the return of political risk in 2017. The post-war free-market order has come under severe challenge from ordinary citizens in the West, who have confounded polling agencies and experts by voting against what they consider to be the elite consensus of open borders, free trade and multiculturalism. This was most evident in the key votes of 2016 – the Brexit referendum and Donald Trump’s clinching of the United States presidency.

2. In 2017, we will see what Trump, Brexit and the rise of far-right parties in Europe all add up to. Elections in Germany and France may provide more upsets. The long and uneven recovery from the Great Recession fuelled the economic insecurity that has found expression in these political developments. The threat of automation also looms large, and for the first time, middle class jobs are on the line. The working conditions of the ‘uber’ economy have added to the sense of precariousness in people’s livelihoods.

3. The solutions that Trump and the European far-right have brought to the table do not address the core issues of technology, productivity and competitiveness. Trump may achieve some temporary stimulus to the old industries of the US economy, but he will be ineffective against the larger economic forces. Those at the centre of the political spectrum, and the left, will also not provide a compelling antidote to Trump or a solution to the economic forces driving citizens’ anger.

4. The global political economy will be volatile in 2017. The bromance between Putin and Trump can only end in tears, as Russia and the US have fundamentally different values and national interests. China will have to manage the threat of trade war with the US, whilst also dealing with its internal economic challenges and a leadership transition. All this will dampen global economic growth.

New approaches to welfare as technology threatens jobs

5. The march of technology is relegating some to what is known as ‘wageless life’. Many workers, both blue collar and middle class, will find themselves displaced by technology. Technology is also reshaping the nature of work, in a process which might be called ‘uberization’, where the traditional job with security and benefits is replaced with task or project-based, independent work. These types of working arrangements place risk on individuals, who can no longer rely on the security of the corporation but in most cases, would also not qualify for traditional welfare schemes. These challenges have inspired a new wave of experimentation, mainly in advanced economies, on guaranteed income schemes, otherwise known as universal income or basic income grants. Technology entrepreneur Elon Musk has argued that automation will drive policy towards a universal basic income.

6. The idea is to provide a modest sum (that meets basic living expenses) to all citizens, irrespective of means or ability. One success story that is often cited is a program that was run in the Manitoba region in Canada in 1979, before being abandoned. A review by academic Evelyn Forget finds that it had a positive impact on the community – health and education outcomes improved. The fear that a universal income would encourage idleness also did not come to pass as the incentive to work was not diminished – the rate at which people worked remained largely the same, save for people staying longer in school and some mothers choosing to stay at home.

7. Proponents of a universal income, who can be found both on the left and on the right, argue that it avoids the bureaucracy of testing for means or complex eligibility criteria. Traditional welfare, as practiced in advanced economies, also tends to punish those who find very low-paying jobs and are thrown out of the system, thus creating a preference for welfare over entry level jobs. With a universal income, work is always a top-up to welfare, not a substitute. As everyone receives a universal income, it also argued to take the stigma out of welfare.

8. A referendum in Switzerland to introduce a universal income was rejected last year. However, in 2017 experiments will be underway in Finland (proposed €560 per month) and the Netherlands (€1000 per adult, €200 per child per month). The idea, whose resurgence has been inspired by likely impact of technology, has also caught the eyes of the entrepreneurial community. The American start-up incubator Y-Combinator is running an experiment in Oakland (US$1000 to US$2000 per month), with one of the underlying hypotheses being that people would be more creative and innovative if their basic needs are taken care of. Lessons from abroad might rekindle a similar debate in South Africa, where a basic income grant has been mooted since the late 1990s. This would bring the unemployed, including the youth, into the social safety net. It has also been argued that universal incomes improve the quality of what people are already doing, be it job search or further education. It could also stimulate entrepreneurship as it provides a cushion for people to take risks. The budgetary implications would be staggering, and these experiments will need to show a net positive benefit.

Creative Africa Rising

9. For most of its contemporary history, commodities have defined the African growth story. Indeed, China’s once-insatiable demand for African commodities underpinned many African economies, including South Africa. But as commodity markets have cooled down, it has become apparent that there is more to African production than natural resources. Financial services, telecommunications and consumer goods companies now regularly feature on lists of the continent’s most valuable companies. But the most untapped resource on the continent is the creativity of its people. For many years, the African content, be it television or music or literature, lived under the shadow of Hollywood, London or Paris. The African creative economy was hampered by low demand, poor distribution and poor branding. The rise of Nollywood was the first major disruption to these state of affairs.

10. The Internet has become a major force in liberating the African creative economy. From literature (see for example the user-powered poetry archive Badilisha) to storytelling to music and video, Africans on the continent and in the diaspora are experimenting with new ways to create, share and consume content.

11. As with financial services, it is mobile platforms that will decisively transform the content landscape. The reach of mobile, especially with increased Smartphone penetration, will answer the difficult question of how to monetise content. By connecting creative output with advertising revenue, subscriptions and corporate sponsorships, mobile will energise the creative economy. Already, there is lots of entrepreneurship in this space with mobile video platforms such as Tuluntulu and iROKO, in competition with global platforms like Netflix. This race to dominate African media has seen some players support musicians, artists, journalists, writers with studio space, and business advice, thus stimulating the creation of local content and investments across the value chain. The winner from all this activity will be the African content creator.