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The battle ahead for Cyril Ramaphosa to fix Africa’s second largest economy – South Africa

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South Africans (SA) have breathed a collective sigh of relief. After extensive campaigns and infinitely examined possibilities, the election is over and the ruling African National Congress is in power with what most democracies would consider a sizeable majority of the popular vote.

After President Cyril Ramaphosa was elected president unopposed by the National Assembly on 22nd May 2019, he assured all South Africans he will be a president for all.

Ramaphosa said he is “truly honored and humbled to be elected to serve people of South Africa”.

“I will seek to act and be the president of all South Africans, and not just those who voted for the party I lead,” Ramaphosa said.

“I will be a president for all South Africans, and not just for the African National Congress.”

He said the composition of the National Assembly is a reflection of the will of the people.

“Collectively all of us who are here have a mandate to build a nation founded on social justice. They also have a mandate to revive the economy to create jobs to actualise hope so that people’s aspirations are met.

In building the economy, the new administration needs to move speedily to revive an economy that has expanded at an annual pace of less than 1.5% for the past four years and tackled a 27 percent unemployment rate by reducing policy uncertainty and bolstering private investment, according to Raymond Parsons, a professor at the North West University’s School of Business and Governance.

“A key test will include the selection of a credible and streamlined cabinet that also enjoys the confidence of business and the markets,” he said.

Before the election, Ramaphosa’s reticence to carry out a clean sweep may stem from his tenuous hold on the ANC in the aftermath of a hard-fought internal election that’s left the party deeply divided and has resulted in some Zuma allies remaining in top party posts.

The president faces a number of urgent economic priorities, and how he handles these will decide which way Moody’s review of South Africa’s roughly R2-trillion of sovereign debt will go. The next review is scheduled for November 2019, but could happen sooner.

If Moody’s decides that risks have increased and downgrades the country to sub-investment grade, SA will be ejected from the Citi World Government Bond Index, forcing asset managers to sell billions of rands worth of SA bonds.

The consequences of a downgrade will ripple through the economy like falling dominoes. A sell-off of rands will cause the currency to weaken and inflation to rise as a result of more expensive imports. A rising fuel price alone has the potential to drive inflation across the economy. In a bid to manage inflation, the South African Reserve Bank could increase interest rates. At the same time, the cost of government borrowing will increase as investors demand a higher return on their investment in government bonds, leaving less to spend on infrastructure. Whichever way we turn, life in SA will become more expensive.

A downgrade will also deal a blow to Ramaphosa’s goal of attracting $100-billion in new investment to South Africa.

Thus, inspiring the confidence of rating agencies, investors, business, labor and consumers is essential to kick-starting the country’s sluggish economic growth rate. How exactly this will be achieved is, of course, the million-dollar issue and investors will be watching the president closely in the coming weeks and months.

Immediate Obligation

The first big post-election milestone will be the appointment of the new Cabinet, an essential step in the creation of a capable state.

“The market will be watching for competent appointments, particularly in the areas of finance, trade and industry, economic development and telecommunications,” says Nedbank chief economist Dennis Dykes.

Upon his election as the president, Ramaphosa said that his new Cabinet would be pleasing to South Africans as he is under pressure to pick ministers untainted by scandal and to trim it down, with its size hinging on the extent to which government departments will be reconfigured for a leaner, more efficient administration.

Asked if he would downsize on his Cabinet, he said: “I am not yet sort of locked on numbers; I am dealing much more with functionality and efficacy.”

It goes without saying that the market will not respond positively to the appointment of people tainted by State Capture, corruption and patronage. However, the president has limited choice and has to stick to the ANC’s prescribed list of candidates, with the exception of two positions where he has the discretion to appoint from the outside.

All eyes will be on the economics cluster, where change is rumored.

Quick policy wins

Many promises have been made, but not kept.

In February, the president spoke about reducing the cost of doing business in SA. How will this be practically executed? The World Bank’s 2018 Doing Business Report placed South Africa 82nd out of 190 economies (compared to a ranking of 32nd in 2010). Improving on the performance in terms of the criteria used by the World Bank for the score — including ease of starting a business, dealing with permits, getting credit and enforcing contracts —should be a priority.

Ramaphosa also promised to accelerate the licensing of the high demand radio frequency spectrum. While some progress has been made as far as the policy goes, the government’s instinctive urge to control this valuable spectrum is hampering progress.

Similarly, simplifying SA’s visa regime has apparently been prioritised, but appears to have been stalled by the director-general at Home Affairs.

“South Africa is losing ground against the rest of Africa and other emerging tourist destinations, that is evident in the stats,” says Dykes. “Making SA an attractive tourist destination is such low-hanging fruit all you have to do is open your mouth. Where is the progress?”

Ramaphosa also promised to review the configuration, number and size of national government departments.

“Cutting down the size of government would send a powerful signal that the president is determined to implement reforms,” says Dykes.

Fighting Corruption

Investors — both local and foreign — will take heart when there is decisive and visible action against corruption, whether led by the private sector, such as Steinhoff and VBS Bank, or by the public sector. It is clear that leadership issues at the National Prosecuting Authority are being addressed, but questions are being asked about the government’s appetite for prosecution.

“Pushing the National Prosecuting Authority to take action is not fully within Ramaphosa’s ambit, but further capacitation would be good,” Dykes said.

“The president does not have to have a hand in the prosecutions, but he can stress the urgency by reiterating government’s commitment to take action,” said Mondi. “He could also announce the new head of the Public Investment Corporation and provide details on Eskom’s chief re-organization officer. These are all signs that he is acting against State Capture and for capacitation.”

Restructuring the economy

Restructuring the economy to support economic growth. Current ANC economic policy will not deliver the growth rates necessary to reduce unemployment and structural reform of the economy is essential.

“South Africa will never become a self-sustaining, self-help, transformational growth story within existing ANC policy frameworks,” says Madalet Sessions, portfolio manager at Denker Capital.

“Without structural reform, realistically the only thing we should expect from Ramaphosa is bureaucratic reform and reduced corruption. But even if this was the case, a more capable state would at the very least support growth.”

Structural reform means treading where angels fear to go.

Black economic empowerment rules, for instance, are complex and administratively burdensome, particularly for small business.

“The new requirements saw small businesses go from a level 2 to level 7 with the stroke of a pen,” says Dykes. “This system is complex and opaque and causes great uncertainty.”

South Africa’s economic policy is often implemented without proper analysis of the consequences. For instance, Eskom and SAA went ahead with revised procurement policies, driven by vested interests, that required higher levels of local procurement, but which drove cost structures to unsustainable levels.

There is a need for the government to implement a policy that is economically sensitive, and not just politically sensitive.

Investing is all about risk and reward. Investors will be watching the government closely to see whether it has the appetite to get this equation right. If Ramaphosa can achieve this, investors will come.

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South Africa

Eskom Crisis and Rising Unemployment– Woes of the South African Economy

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South Africa’s outlook has been dealt several heavy blows in recent times following Eskom’s financial results, and the latest unemployment data, which has raised the question: where to from here? South Africa’s unemployment rate climbed substantially in Q2 2019, StatsSA said on Tuesday, 30th July 2019.

The Quarterly Labor Force Survey for Q2 2019 showed that the unemployment rate increased by 1.4 percentage points from 27.6% in the first quarter of 2019 to 29% in the second quarter of 2019.

Eskom, meanwhile, reported a record loss for the year ended March 2019, of R20.7 billion, following years of corruption that has seen the power utility’s debt spiral out of control, fueling rumors that international ratings agency Moody’s could downgrade South Africa’s sovereign debt to junk status.

Analysts had hoped for a turnaround in fortunes following the election of president Cyril Ramaphosa, and post general elections in May. However, the country has been dealt one bloody blow after another, raising serious questions about its turnaround prospects and timeframe, which seems to get further away as both global and local financial institutions narrow economic growth.

Dawie-Roodt-Chief-Economist-at-Efficient-Group

The reason why the state’s finances finds itself in such a death-defying spiral, according to chief economist at Efficient Group, Dawie Roodt, is because, especially since 2009, state spending has increased relentlessly at a time when tax collections collapsed– mostly because of a faltering economy.

“At this rate of debt increase, it is very clear things will turn out very unhappy, very soon,” he said.

Roodt said “note that to fix the problem of collapsing fiscal accounts, a combination of three things needs to happen to stabilise the debt to GDP ratio.

“The first thing is that the economy should preferably start growing at a rate of 6%, at which rate the debt to GDP ratio will stabilise.

“Unfortunately, the ruling elite seems to be hell-bent on doing even more damage to the economy with all sorts of silly socialist ideas, like the suggested creation of yet another state bank, a new mandate for the SARB and the unaffordable NHI. Because of this, economic growth, believe me, will not save us from this fiscal cliff,” he said.

A second option is to increase taxes by the equivalent of 5% of GDP (current market price), which is approximately R250 billion. For example, VAT needs to increase by more than 11 percentage points to get this kind of money, or personal income taxes need to increase on average by nearly 10 percentage points.

This option, Roodt stressed, is irrelevant as a tax increase of this magnitude would have a huge adverse effect on growth, while overburdened taxpayers would likely revolt.

“Preferably, and the only realistic option left, is to cut state spending with a similar amount: R250 billion,” Roodt said.

“Percentage wise that is a real reduction in state spending of approximately 15%, or 20% in nominal terms. Now, show me the politician with the clackers to go and give COSATU the good news. But even if we could implement such austerity measures, the initial impact on the economy will be hugely negative – damned if you do, damned if you don’t,” the economist said.

Roodt also delivered a scathing assessment of president Ramaphosa.

“Judging from president Ramaphosa’s actions so far, he must either be weak, doesn’t appreciate the danger in which the South African economy is, or he simply doesn’t care,” Roodt said.

“I think we have a weak president that simply doesn’t have the political capital to implement unpopular structural changes. All that is left for him to do is to use (gutted) institutions, like the NPA, to do the heavy lifting for him. He is playing the “long-game”, but this economy doesn’t have a long time.

“Even if we can somehow wave a magic wand and get rid of all the corruption and incompetence in the state and SOEs overnight, the perilous condition of the state’s finances will need an extraordinary attempt to save us from further economic collapse,” Roodt said.

Roodt said that none of his three scenarios will likely prevent the inevitable: “Debt will continue to balloon, the economy will falter, poverty and unemployment will keep going up and those that are responsible for all the troubles will keep on blaming “the others” for their absurdities”.

“By then the only remaining alternative will be to inflate your debt away. But for that to happen you need to control the SARB – and with Lesetja Kganyago at the helm, that is not going to be easy. But be assured, as we sink further into this debt chaos the pressure on the SARB will become relentless and eventually also the SARB will buckle under the pressure. And then, inflation.”

“What we must understand,” Roodt said, “is that no structural adjustment, no new dawn, no fresh start can be taken seriously unless it includes an admittance that there are just too many trying to live off too few. Many tens of thousands of civil ‘servants’, including those at SOEs, are simply not needed. They must go.”

Economic growth– from bad to worse.

Early second-quarter indicators signal some respite following a sharper-than-expected contraction in Q1 due to rolling power outages. The retail sector picked up in April; car sales, on average, bounced back from the first quarter in April–May; while manufacturing activity grew at a faster pace, on average, in the same two months. Overall growth prospects remain bleak, however, with uncertainty over the restructuring of Eskom, the heavily indebted state-owned power utility, weighing on economic sentiment. Following slight upturns in April, the manufacturing PMI swung back into negative territory in May–June, and business confidence faltered again. The government is considering other measures to aid Eskom in addition to the ZAR 230 billion pledged, while minimizing the risk to public finances and credit ratings. Options on the table include swapping the firm’s sizeable debt for sovereign bonds or using a special purpose vehicle.

The International Monetary Fund becomes the latest key institution to slash its growth forecast for Africa’s most-industrialized economy, which may have fallen into its second recession in as many years. It now expects the economy to expand by 0.7% in 2019, half of what it estimated in in the beginning of the year, and similar to forecasts by the South African Reserve Bank and Bloomberg Economics.

The economy shrank the most in a decade in the first quarter of this year as the nation suffered the worst power outages since 2008.

The National Treasury, which forecast growth of 1.5% in the February budget, is expected to lower its prediction in the October mid-term budget. While the World Bank’s 1.1% estimate seems to be an outlier, it was published as part of its mid-year Global Economic Prospects outlook on the same day that Statistics South Africa released data showing a much bigger-than-expected contraction for the three months through March. South Africa is stuck in its longest downward business cycle since 1945, data from the central bank showed in June.

In all, growth is seen decelerating this year as persistent power outages continue to weigh on economic sentiment and curb investment and private spending. That said, a pickup in export growth should cushion the slowdown. Downside risks to the outlook stem from policy uncertainty surrounding Eskom’s debt restructuring and President Cyril Ramaphosa’s reform agenda.

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