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South Africa

Tito Mboweni’s Budget for the Tough Times: Planting the seeds of future economic success

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Finance Minister, Tito Mboweni, delivered South Africa’s 2019 Budget on 20 February – against a challenging economic backdrop of 1.5% growth, a deficit forecast valued at 4.5% of GDP in 2019-20, and the ongoing Eskom power crisis. The budget acknowledged the difficult issues facing the South African economy but included a range of measures to help solve them, including numerous changes to the tax regime and the introduction of a carbon fuel tax.

Mboweni took a firm, practical approach in his 2019 statement and signaled that the time has come for decisive action. Striking a hopeful tone, the Finance Minister pointed out that his budget did not include “quick fixes” but was a way to “plant the seeds” of future economic success.

The budget can only be seen as a budget for the tough times. It is a budget that keeps an eye on the elections, without being a spendthrift. Though very little was given away to any one sector, given the constraints, it should be said that there was a lot of common sense in the narration.

The most notable announcement to come out of the budget is the introduction of a “chief reorganization officer” for all state-owned entities (SOEs) seeking a government guarantee. This is common sense. Under business as usual, SOEs have gone on spending without regard for the liabilities they were imposing on the general discus. Leaders of these companies went out and fulfilled political objectives that did not have any relation to South Africa’s reality of economic struggle and difficulties.

Eskom’s decadence is especially galling and risky for the discus, given the rate at which the company has accumulated debt since 2007, with its debt rising from R40bn, to R420bn in 2018.

At the same time, the minister soft-landed the very necessary debate about the role that SOEs play in South Africa’s economy. In the past, the minister has made clear his aversion to the state owning some entities such as South African Airways which plays no role whatsoever in contributing to the achievement of South Africa’s developmental goals. This is a hot potato discussion in South Africa currently. With elections coming up, it is perhaps one that the government and the ruling party do not want to dabble in too much as it can be very polarizing and will open the ANC up to internal discord as there is a very strong lobby within the party against moves to privatize SOEs.

It was also notable that the minister made clear that from henceforth, government would take a stricter approach to issuing government guarantees and bailouts to SOEs for operational purposes. Even a financially illiterate person knows that banks would never fund you to buy groceries against a growing debt burden. It thus makes no sense that government has been throwing out lifelines to SOEs who are struggling to improve their performance and depending on government’s largesse for their continued operations.

The issuing of policy guidelines by the Department of Communications to the Independent Communications Agency of South Africa (ICASA) for spectrum allocation is a positive step. It follows on statements by President Cyril Ramaphosa to make the price of communications more affordable if South Africa is to achieve its ambitions of becoming an active participant in the Fourth Industrial Revolution. It is also a wink to the upcoming general elections as the price of data has been something that South Africans, especially the young, have been very vocal about.

Similarly, a fully subsidized education and training for poor students at a cost of R111.2bn is an investment in South Africa’s future. Enabling 2.8 million poor South Africans to gain access to higher learning institutions is a move in the direction, even if this affects the fiscal framework negatively in the short- to medium term.

The announcement to freeze the salaries of Members of Parliament, Provincial Members of Parliament, as well as the executive is something of a gimmick, though it makes sense symbolically. However, the announcement may portend a new way of doing things which recognizes that state leaders cannot continue to receive preferential treatment whilst the general public is expected to make ends meet.

The review of South Africa’s allowances for civil servants stationed abroad is probably justified given the difficult fiscal conditions the country is grappling with. However, the government will need to manage the review carefully to ensure that ultimately, the best skilled people are attracted to serving in the diplomatic services of the country.

Unfortunately, money is a major incentive for accepting a posting to a place such as Mauritania, Burundi or Russia. The same care should be exercised in managing the public sector wage bill as government is already struggling to attract the most talented. Delivery against the important objectives that government has set requires good minds, and absolute personal commitment to serving the South African public. The best talented will not forsake the potential for high pay in the private sector for a place that has a bad reputation, and which has bad salaries. This is a fact!

Reducing the size of the public service is a good decision. The president and his cabinet will require strong backing from the entire ANC and alliance to make this happen. We know that South Africa’s labor unions are very vigilant against job losses. The mere whiff of restructuring at Eskom was enough to motivate the National Union of Metalworkers of South Africa (NUMSA) to picket Eskom, even in the absence of a definite pronouncement about laying off workers.

Similarly, government was forced to walk back any latent ambitions to downsize the South African Broadcasting Corporation (SABC), against the wishes of the board of directors, to placate the Communications Workers Union (CWU) which declared in no uncertain terms its displeasure at the plans of the corporation to reduce the workforce.

It is encouraging to hear that President Ramaphosa took an active, detailed interest in the preparation of the Budget. This probably speaks to the anxiety the president has about ensuring that the important programs that he announced during his State of the Nation Address are properly resourced. It also speaks the urgency with which the president views the matter of stabilizing South Africa’s economy.

 

  • Thembinkosi Gcoyi

Managing Director

Frontline Africa Advisory

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South Africa

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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