Here’s our view on what to expect next year

Posted in: Capital Markets, Economics, i-Blog, Politics, SOEs, South Africa on December 13, 2019

By Dr Stuart Theobald, CFA

Next year will be dominated by two factors: dealing with Eskom and the public sector wage bill. Both are crucial to the longer-term outlook for our country. Depending on how they are managed, the medium-term scenarios range from dismal to reasonably positive. 

We are expecting the year to start with bad news, with fourth quarter GDP figures showing the economy shrunk again in the current period. That will have been mostly because of the load-shedding we’ve experienced over the past two weeks, but also because of fundamentally weak drivers of economic activity. Business and consumer sentiment levels are extremely weak, which is reflecting in subdued consumer spending and fixed capital investment. Businesses are still investing – but merely to maintain output rather than to grow it.

The year ahead has the potential to fundamentally change this. But it will require leadership, decisiveness and, most importantly, actual implementation by government. As the Economist magazine recently put it: “The fixes required to mend South Africa’s economy are well known. But somehow, they never happen.” It is this history that must change conclusively next year. The underlying political drivers to achieve that are slowly changing. Our legacy of implementation failure reflects the broad ideological church that is the ANC, whose effort to accommodate diverse viewpoints often means inaction is the best strategy to maintain political calm. But the cost of inaction is continuing economic decline. The National Treasury has to somehow find R50bn of savings in the civil service wage bill by the February budget, or else a swift downgrade will be instituted by Moody’s, the last agency to grant South Africa an investment grade rating. If that happens, all options become much more difficult with the cost of debt increasing and access to international investors declining.

However, if a downgrade does happen (and our base case is that it will) we must not lose focus on changing the microeconomic structure of the economy. We need policies that get the private sector to start investing and producing. The Eskom solution is part of that because without reliable energy, no business will be expanding production, especially in the industrial sector. But we also need to fix mining legislation that has massively constrained expansion in the mining industry, and spectrum allocation that frustrates the public’s access to cheaper broadband and expansion by the telecoms industry. We also need to deal with labour legislation that continues to protect the interests of a narrow, employed elite at the expense of businesses and the unemployed. We’ve made progress on dealing with the damaging visa debacle that that affected tourism but we need to move more decisively on visas for skilled migrants to come and work in South Africa. Alongside Eskom is the wider energy supply industry, in which the fifth round of the renewable energy programme needs to be launched as soon as possible while small-scale and even utility-scale embedded generation needs a clear and simple policy environment so as to diversify contributions to the grid.

As we close the year, there are positive signs. The business rescue of SAA is a Damascene moment. A major taboo has been shattered. National Treasury will not continue funding dysfunctional SOEs until the whole government balance sheet is destroyed. The progress of business rescue will be an important lodestar for what happens in other SOEs. The Nuclear Energy Corporation of SA is also insolvent and cannot pay salaries. Denel ran out of cash in June. Both of these should be put in business rescue too (though their legislation makes this difficult – parliament will probably have to do it through an act). Prasa has been put into “administration” though the lack of legal grounds for this will be a problem and it will have to be retrospectively validated through urgent legislation next year.

Much depends on the president delivering the decisive leadership that is needed. We see his main challenge as extending his power into the “clay layer” of directors-general and their deputies and chief directors in the civil service. Factionalism, laziness and ideological resistance mean policies die at the point of implementation. The presidency needs capacity to monitor and call out implementation failure. He is starting to build some with a raft of advisors in key positions in the presidency, but he needs more support. He could achieve a lot with a decisive cabinet reshuffle that jettisons ministers that have not been able to align their departments with the policy vision. The department of energy and mineral resources is a key example, with home affairs not far behind.

Some policy steps are not positive for the business environment. The National Health Insurance scheme is dead in the water because it is simply unaffordable, but efforts to force it into reality will continue. Land reform remains an important issue. This year there have been some constructive moves with the presidential panel of experts on land reform submitting a positive report with a clear vision that would overall be good for the country if implemented. The amendment to section 25 of the constitution to allow expropriation without compensation have now been drafted and the wording is reasonably constrained. Nationalisation of the Reserve Bank is an unnecessary and divisive policy with no upside and significant downside that has become a cause célèbre of a faction in the ANC. While it has been painted as an issue of protecting the independence of the bank by taking it into public control, it is notable that the same faction were losers in the banks’ efforts to shut down accounts used for money-laundering the proceeds of state capture. We see the move as the first step in a strategy to bring the Reserve Bank to heel, which would be extremely destructive to the financial system. Prescribed assets is another negative policy, but one we think will fade away as more creative and pro-market innovations are introduced to encourage greater private sector investment in infrastructure.

If all this makes you nervous about what next year holds, don’t be. Each of us carries the capacity and responsibility to help shift outcomes in a positive direction. Intellidex is engaged on multiple fronts working with clients to deliver the research needed to understand how policy and investment opportunities can deliver growth and positive outcomes for all South Africans. We are optimistic that things will get better.

We look forward to working vigorously with you next year to do that. The team at Intellidex wishes you a fantastic Christmas and New Year.

Best wishes,

Dr Stuart Theobald, Chairman.

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