JONES GONDO: Sona shows SA inching towards action on past promises

President Cyril Ramaphosa’s state of the nation address (Sona) was promising, but not necessarily market-moving given that the international macroeconomic backdrop seems to overshadow local news. 

We believe the market has become circumspect about pricing in political and policy promises about reform implementation, and would rather take a more measured and conservative approach and focus on tangible results and outcomes. 

The extension of the R350 social relief of distress (SRD) grant to the end of March 2023 will not come as a surprise to the market. The R42bn cost had already been priced into the fiscal baseline forecasts. What would have been a fiscal surprise would have been the introduction of a much larger basic income grant (BIG), which had received mixed support in the public space in the lead-up to the Sona.

The president has essentially deferred any decision to next year, but we think the inevitable policy position is that the BIG will happen; the debate is on the coverage and the cost, in line with the country’s fiscal affordability constraints. Reversing the SRD will not be politically palatable. 

Encouragingly, the president paid much attention to long-standing economic reform measures as set out in the 2020 Reconstruction & Recovery Plan. These reforms are designed to lower the cost of doing business and improve cost competitiveness in the economy in the medium term, and reignite growth dynamics and job creation.

Implementation has been slow, but it seems we are now much closer to action on past promises; especially the main action points laid out in the 2021 medium-term budget around energy, port and rail infrastructure reforms, as well as legislative reforms to enable skilled migration into SA and facilitate tourism via e-visas.

The following can be said about the priorities:

• Diversify energy generation to introduce competitive energy markets and ease the supply constraints from Eskom. Significant progress is being made on this front. The president mentioned that the electricity supply shortfall is 4,000MW, and this is expected to be eliminated over the next few years via the procurement of 15,000MW of capacity via various independent power producers, including gas, renewables, battery storage and embedded generation projects. Eskom’s unbundling has commenced and has created the space for a separate transmission company that acts an independent transmission system & market operator. This is the first step to shifting to a more competitive market structure in energy generation that can support a more diverse energy mix. The cabinet approved enabling amendments to the Electricity Regulation Act for public comment on February 10. 
• Releasing broadband spectrum and auction to commence March 1. This is on track. The president announced that the Independent Communications Authority of SA will finally commence with the auction of high frequency broadband spectrum within weeks. This has been the single biggest constraint to the growth of the telecommunications sector and a drag on the country’s potential growth rate.
• Port and freight rail logistics reforms to allow third-party access. This is an integral part of Transnet’s medium-term strategy. Third party access to freight-rail slots on the Durban corridor is touted to commence in April, while requests for proposals from private partners at the Durban and Ngqura container terminals are expected soon. However, Transnet has a large capital expenditure programme to upgrade infrastructure and unlocking the efficiencies needed for export competitiveness may still take much more time to realise.
• Accelerate infrastructure investments. With the investment conference upon us, the president is bullish about the pipeline of shovel-ready projects, although gross fixed-capital formation data and investor confidence surveys do not yet mirror the same sentiment. 

The Infrastructure Fund is yet to be capitalized meaningfully due to Covid-19 pandemic expenditure reprioritisation. However, the president said that the fund has a R100bn fiscal allocation over the next 10 years aimed at assisting the state to prepare a pipeline of catalytic infrastructure projects to the value of R96bn; including water and sanitation, transport, student accommodation and telecommunications. 

We can’t ignore the severe loss of project planning and delivery capacity within the state, and there is still a very high execution risk around public infrastructure investment. Private sector investment may continue to lag. The green hydrogen economy and investments around the Just Energy Transition are still early stage and are more aspirational goals until some of the background work by the Presidential Climate Commission begins to take root.

The president is not taking shortcuts with his policy formulation and wide consultation via social compacts to manage the trade-offs of winners and losers that come with pursuing structural reforms. The process is necessarily slow, much to the chagrin of investors and society. However, in retrospect the use of presidential commissions and advisers has been a pragmatic approach to crowd in the skills, leadership and commitment of the private sector, NGOs and labour, and accelerate some of these critical reforms so that they are focused on practical outcomes and not stuck in an ideological morass. 

If some of these promises come to fruition in 2022 there is upside to the growth outlook in SA.

• Gondo is senior research analyst: credit, at Nedbank Corporate & Investment Banking.