December 7, 2019//-Although South Africa’s main financial institutions, the Ministry of Finance and the Reserve Bank, are now under competent management, the economy continues to limp along. What are the bottlenecks to growth and what can ‘Team Ramaphosa’ do to kick-start growth?
Analysis by Mushtak Parker.
Spare a thought for South African President Cyril Ramaphosa and his top two national economic management officials – Finance Minister Tito Mboweni and Governor of the South African Reserve Bank (SARB), Lesetja Kganyago as they collectively set out to stabilise the economy.
Mboweni, has the unenviable task of steering the economy onto a higher GDP growth trajectory, narrowing the fiscal deficit and the GDP/public debt ratio, attracting more inward FDI and lowering the youth joblessness rate of over 50%.
All this over the lifetime of the current parliament, following the ruling African National Congress’s (ANC’s) landslide election victory in May.
The evidence suggests that the response of ‘Team Ramaphosa’ has hitherto been high on aspirations, good intentions and rhetoric but low on substantive policies.
It seems that the President is still coming to terms with how to deal with the legacy and economic mismanagement of his predecessor, Jacob Zuma, the perceived pariah of the Rainbow Nation’s current woes and architect of the infamous ‘state capture’ of assets.
The response has also been undermined also by a debilitating ideological struggle at the heart of the body politic – between a neo-liberal outlook, and the ANC’s socialist statist vision of an economy serving the majority of the population to promote justice, equality of opportunity and prosperity.
Since the collapse of Apartheid and the election of the ANC into government in 1994, this ideological fault line has continued to reverberate.
Just look at the furore over the ANC’s land reform proposals regarding its Expropriation Without Compensation (EWC) policy, and the recent Green Paper on the proposal to introduce a National Health Insurance (NHI) system in South Africa.
Both policy proposals are based on genuine historical grievances from the Apartheid era, but experts such as Dr Anthea Jeffery, Head of Policy Research at the Institute of Race Relations (IRR), berate the sheer mishandling of the land reform process in particular.
The President is also held hostage by the endless factional infighting and jockeying for patronage within the ANC between his own supporters, the militant left in the COSATU trade union, the ANC’s coalition partner, the South Africa Communist Party (SACP), and remnants of the surviving Zuma apparatchiks.
This governance volatility has been a feature of the South African body politic almost from the start of ANC rule in 1994. The political acumen and sheer personality of the iconic President Nelson Mandela put a temporary lid on it, but his successors, Thabo Mbeki and Jacob Zuma, were incapable of managing dissent and factionalism.
This fault saw both removed from the ANC presidency and the leadership of the government. This is the yardstick that the Ramaphosa presidency will also be measured by.
According to Fitch Ratings, since the May election, in-fighting within the ANC party between supporters of President Ramaphosa and his predecessor, Jacob Zuma, has continued.
“The in-fighting will constrain economic policy making, which is already difficult as the ANC struggles to meet its objectives of reducing inequality, boosting GDP growth and stabilising public finances amid rising pressures from radical parties. These include the small but populist Economic Freedom Fighters party, which has had significant success in dominating the political agenda.”
SARB on slippery surface
The Governor of the Reserve Bank, Lesetja Kganyago is caught between a rock and a hard place. The good Governor is one of the few South African officials who has maintained an international reputation for operational independence and competence, especially in setting monetary policy with its emphasis on maintaining price stability. (See interview, page 38.)
He can hardly have expected better endorsement than that from the likes of Fitch Ratings in its latest Outlook on South Africa report: “The credibility of SARB and its inflation-targeting regime are an important credit strength. Inflation has recently undershot expectations, allowing SARB to cut its interest rates in July.
“The banking sector is well-regulated and healthy. The non-bank financial sector (including pension funds and long-term insurance) is large, with assets of 184% of GDP at end-2018. Given the sector’s exposure to government debt is relatively low and caps on foreign investment, it could help absorb a potential outflow of foreign investors.”
Similarly, in its Full Rating Report on South Africa a month later, following its affirmation of the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) and Long-Term Local Currency IDR, both at BB+, Fitch reiterated that “South Africa’s rating is supported by strong governance and macroeconomic institutions, such as SARB and the National Treasury.”
However, for Governor Kganyago, the writing may be on the wall, not because of the commendable work SARB has done but because of the looming political ‘interference’ through government proposals to nationalise the currently privately-owned Reserve Bank.
Both these key state officials have good reason to feel insecure despite their own excellent performances. There have been ominous precedents of finance ministers and central bank officials being unceremoniously dumped if they fail to follow the instructions of political masters.
Remember Pravin Gordhan, the current Minister of Public Enterprises and the man handpicked to sort out the country’s failing State Owned Enterprises (SOEs)?
During his second stint as Minister of Finance from 2015 to March 2017, he was constantly at loggerheads with Zuma over bailing out SOEs, over a nuclear power deal with Russia’s Rosatom and allegedly failing to aggressively pursue policies in support of economic transformation.
On the evening of 30 March 2017, Zuma wielded more of an axe in the Night of the Long Knives when he sacked some 10 Cabinet ministers, including the internationally respected Gordhan and his deputy, Mcebisi Jonas. Such events tend to linger long in the memory.
Pace of reforms all-important
So, while the finance ministry and central bank appear to be under competent management, what are the near future prospects for the South African economy?
The IMF, the credit ratings agencies and even Governor Kganyago all concur that South Africa’s economic growth problems are “structural not cyclical”.
The economy needs to grow at over 5% per annum for the country to start meaningfully addressing the issues of high unemployment, high economic inequality, lowering the cost of living and a more equitable wealth and income distribution.
IMF economist and mission leader to South Africa, Ana Lucía Coronel, was blunt in her message to the South African government: “Amid challenging global economic conditions, the growth outlook will depend critically on the pace of implementation of reforms that address long-standing structural constraints.
“If reform implementation accelerates sufficiently to lift business confidence and jump-start private investment, growth would be reignited. However, if reforms are delayed, investment would fail to pick up, economic growth would remain weak in the medium term, and per-capita income would continue to decline. With underexploited export potential, the external position would remain weak.”
The reality is that GDP growth forecasts at best remain modest and below population growth. The IMF’s forecast for this year is 0.7%; Fitch’s latest forecast is 0.5% in 2019, the fourth year of GDP growth that is below trend population growth of 1.6%.
Fitch expects “a moderate rebound in 2Q19 as ESKOM’s electricity supply has stabilised. Growth will accelerate mildly to 1.7% in 2020 and 1.9% in 2021, partly driven by replacement investment following a long period of anaemic capital spending.”
In contrast, the Treasury anticipates economic growth in South Africa lifting to 2.1% by 2021. “But be warned,” says Ansara. “Treasury forecasts have tended to be wrong by a 50%+ margin over the past decade. Implicit in the forecasts are policy changes that we believe are unlikely to materialise.
“The Presidency wishes for economic growth rates over the next decade to exceed the population growth rate, which suggests an all too modest long-term growth target of 1.5%+.
For various reasons, most notably electricity supply and ideology, our working assumption is that a growth rate of somewhere between 1.5% and 2% is probably the top end of what could be achieved over the short-to-medium term.
“However, even this modest figure faces significant downside risks while South Africa is geared to steep reversals which could see the growth rate slip into negative territory.”
More than charm needed
No amount of charm offensive by ‘Team Ramaphosa’ in wooing potential investors at the Japan-SA Business Expo in Yokohama, at the WEF Africa summit in Cape Town and in the State of the Nation Address to parliament in September, will be sufficient to turn things around.
Ramaphosa’s Second South African Investment Conference scheduled for November in Johannesburg will be the defining indicator of how far the government has progressed towards achieving its goal of securing R1.2tn in new investment.
How Ramaphosa reconciles this with the fact that 13 bilateral investment treaties (BITs) have been cancelled with Western countries remains to be seen.
The Protection of Investment Act of 2015, which was signed into law in 2018 and which gives both foreign and local investors the protection of Section 25 of the Constitution, is undermined by the fact that Section 25 is now to be amended to allow Expropriation Without Compensation (EWC). Any right to investor-state arbitration for foreign investors has been excluded, both under the Protection of Investment Act and under the new International Arbitration Act of 2017.
The National Treasury’s consultation paper, Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa, does not pull its punches.
“South Africa’s current economic trajectory is unsustainable: economic growth has stagnated, unemployment is rising, and inequality remains high,” it states. “The government should urgently implement a series of reforms that can boost South Africa’s growth in the short term, while also creating the conditions for higher long-term sustainable growth.”
Fitch clobbered the country in its July rating by revising the outlook to negative from stable. The National Treasury in response to the rating action, which remains below investment grade, merely stressed that it takes note of Fitch’s decision and “is aware of the strain and risk that SOCs particularly ESKOM present to the fiscal framework. Nonetheless, the rating agency has acknowledged that government is making efforts to boost growth and the investment drive.”
The view from outside is mixed. While Fitch downgraded its outlook from stable to negative, Moody’s, in contrast, has expressed confidence in the stabilisation of SA’s debt through political commitment to policy reform. Moody’s did, however, cut their 2019 growth outlook to 0.7%, in line with Treasury expectations. Moody’s expects economic growth of 1.5% for 2020.
Talk of South Africa being forced to seek a standby loan from the IMF is rejected by the IRR’s Marius Roodt, partly because only 10% of the country’s total outstanding gross debt of R280bn ($18.6bn) – excluding ESKOM – is foreign currency denominated. Most of South Africa’s public debt is rand denominated.
The stakes are indeed high. As the IRR’s Roodt observes: “South Africa is now in its longest-ever downward business cycle, which has lasted 66 months. It is unlikely that there will be any positive change in the near future.
There may be cosmetic tinkering in some areas, but real structural reform is unlikely to occur, which means South Africa’s economic outcomes will remain poor for the foreseeable future.”
But if structural reform does occur – and there is no good reason why it should not be given the right environment – the country’s solid fundamentals could shine through and growth can pick up – as long as the optimists continue to hold sway both in government and the market.
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