Five post-election economic milestones to watch

South Africans have breathed a collective sigh of relief. After extensive campaigns and infinitely examined possibilities, the election is over, votes have been cast and the counting is underway. But now is not the time for anyone to put their feet up, least of all President Cyril Ramaphosa.

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, labour 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.

The first milestone: Cabinet

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.

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 rumoured.

The second milestone: Opening of the 6th Parliament

Beyond the Cabinet appointments, the first sitting of the National Assembly, when MPs will be sworn in and the president elected, is provisionally scheduled for Wednesday 22 May with the State of the Nation Address following shortly thereafter.

The State of the Nation address will be the vehicle through which the president signals his intentions to South Africans and beyond.

“Investors will be looking for assurances that the ANC plans to stick to its macroeconomic policy and will improve fiscal discipline,” says Lumkile Mondi, a senior lecturer at Wits University’s School of Economics.

The government’s ability to support growth through capital expenditure (infrastructure, not salaries) has been hampered by SA’s unsustainable fiscal policy, which has resulted in a deterioration of the public sector’s net worth as it accumulates more debt. The country needs to cut expenditure relative to GDP. However, debt continues to increase, with our debt-to-GDP ratio now at 56.2%.

Investors also want clarity on the sanctity of the South African Reserve Bank and how contingent liabilities (the biggest of which is the Eskom debt) will be financed.

“The president has his work cut out post the election. He needs to believe that South Africans want more than the ANC has brought thus far. Even if he is not supported in the ANC, he is supported in the country and the ANC cannot do without him. Adopting market-friendly economic policies will require some balancing to get the various ANC factions together,” says Mondi.

The third milestone: 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 our 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.

The fourth milestone: 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 reorganisation officer. These are all signs that he is acting against State Capture and for capacitation.”

The fifth, and most difficult, milestone: 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. DM