A mountain to climb
Cyril’s next steps
If President Cyril Ramaphosa can’t overcome SA’s political and capacity constraints, the country won’t grow fast enough to achieve fiscal and social sustainability and prevent further ratings downgrades
With Cyril Ramaphosa ensconced in the presidency for the next five years, the economy on the skids and unemployment on the rise, he might be tempted to conclude that his priority should be to draft a clever economic plan to get growth going.
But while the overwhelming consensus is that restoring growth should be the new government’s top priority, few economists believe that spending months wrangling over policy formulation is what SA needs right now.
"It would be a negative if another growth-plan formation process was announced," says Peter Attard Montalto, head of capital markets research for Intellidex. "This would show that Ramaphosa has not learnt that all the answers and policy are already under his nose and that implementation now is all that matters."
Nazmeera Moola, Investec Asset Management’s deputy MD and head of investments, also doesn’t think SA needs to draft a new economic plan in the short term, arguing that "there is enough low-hanging fruit to work with for now".
Rather, Ramaphosa’s first step should be to appoint a much more credible, reform-minded cabinet as well as forward-thinking people to chair the parliamentary committees, especially those relating to public accounts and public enterprises.
Moola believes that SA will start to experience real progress if this were to happen. "I am a huge believer in leadership, so the new cabinet is very important," she says. "We need good people who will stick around for an extended period so they can get to grips with their portfolios."
Among the most important appointments will be that of finance minister. Economists are divided on whether SA’s opinionated incumbent, Tito Mboweni, should stay or go.
Citibank economist Gina Schoeman says financial markets are "highly sensitive" to Mboweni’s retention. "SA has had a high turnover of finance ministers over recent years and, together with the need for continuity, markets appear satisfied with Mboweni’s frank dealings with government inefficiencies," she says. "We are quite sure Mboweni will stay on."
Moola doesn’t buy the continuity argument. Much more important, she believes, is rebuilding the National Treasury, which has endured continuous attacks and upheaval since the axing of former finance minister Nhlanhla Nene in December 2015.
"We need a long-term plan both for SA’s finances and for rebuilding the Treasury as an institution to stop the bleed of good talent and attract back people," she says. "[Mboweni] has done an adequate job, but nothing in his approach has suggested that he has any long-term commitment to his job."
What investors and businesses crave most is policy certainty and a government that gets the basics right, like keeping the lights onDave Mohr and Izak Odendaal
Attard Montalto is expecting a series of positive "big bang" announcements and events over the coming month that will stoke fresh "Ramaphoria" and broadly keep SA assets on the front foot. These will include a good-enough cabinet, a second Eskom bailout, and a series of positive anti-corruption moves to which the markets will react positively.
However, he expects investors to remain sceptical about the government’s ability to lift SA’s potential growth rate — stuck at about 1.5% — until substantial policy reform is enacted.
Having been let down before, investors lack conviction that Ramaphosa will clean out the dead wood from his cabinet. Almost half of the 20 institutional investors polled by Citibank in London last week say they do not expect the president to deliver a reform-minded cabinet, against only about 25% that believe he will (see graph).
Similarly, 46 financial sector firms polled by Intellidex before the elections assigned only a one-third (33.9%) probability to meaningful, growth-boosting reforms being put in place after the election.
Such scepticism reflects the fear that Ramaphosa will remain hamstrung by factionalism in the ANC. The need to consult and compromise to keep a broad national executive committee coalition intact through to the ANC’s 2022 elective conference has resulted in Ramaphosa adopting a glacial approach to economic reform over the past year, even as the economy slowed and the country’s finances deteriorated.
So the big question following the ANC’s 57.5% election victory is whether Ramaphosa will finally manage to exert his authority and become the bold, decisive leader the economy needs.
Intellidex expects Ramaphosa to become slightly more assertive, but because he will still be required to make extensive compromises, any positive policy reforms will likely be offset by backward steps that create uncertainty or are anti-growth.
For example, Intellidex expects the government to finalise visa reform, the spectrum auction, a constitutional amendment on land expropriation and the new Integrated Resource Plan this year. But it also expects the mining charter, national health insurance, Reserve Bank nationalisa- tion and prescribed-asset requirements to keep spawning growth-sapping headlines and uncertainty for the foreseeable future.
Old Mutual Multi-Managers strategists Dave Mohr and Izak Odendaal agree that the prospect of greater policy reform and certainty will likely remain limited by the same factors that pertained before the election: a ruling party that is divided and a president who is unable to make unilateral decisions.
However, there is little doubt that, without a return to growth, SA’s fiscal position will continue to deteriorate and the country will lose its last remaining investment-grade credit rating with Moody’s. This could set in motion a negative cycle of falling confidence, growth and social cohesion, and rising debt.
The situation prompted Moody’s to warn last week that unless Ramaphosa implements effective policy change, "the sovereign’s credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low".
Without policy measures that bring the deficit down from recent levels of 4.5%-5% of GDP, SA’s debt ratio will likely rise above 70% (including Eskom’s guarantees) over the next few years, Moody’s added. The deficit would be even higher in a downside scenario involving weaker growth, a wider fiscal deficit and tighter financing conditions.
But even if Ramaphosa clears the first hurdle by appointing clean, credible leaders to the cabinet, and then surprises the sceptics by initiating real policy reform, it is still unclear whether that will be enough to ensure effective delivery takes place.
Many commentators fear that the Jacob Zuma years have destroyed nearly all the government’s implementation capacity. For this reason, most have welcomed Ramaphosa’s move to create a policy advisory unit in the presidency, Policy & Research Services, modelled along the lines of former president Thabo Mbeki’s powerful Policy Co-ordination & Advisory Services unit.
Mbeki’s unit was headed by ANC heavyweight Joel Netshitenzhe and had serious intellectual heft. Ramaphosa’s policy head, Busani Ngcaweni, will lead the new unit. Though Ngcaweni lacks political clout, he is expected to do well, provided he can attract serious policy experts to staff the unit.
The fear is that implementation will continue to falter unless Ramaphosa surrounds himself with a strong team of policy advisers and ministers who are able to co-ordinate and strategise to push policy ideas over the line and work together to keep delivery on track.
It would, therefore, be unfortunate if the policy unit were to become preoccupied with developing a new economic growth plan at a time when the focus should be on restoring SA’s working fundamentals.
"What investors and businesses crave most is policy certainty and a government that gets the basics right, like keeping the lights on," say Mohr and Odendaal.
Business Unity SA agrees. It says investors want to see the swift, comprehensive reform of state-owned entities, starting with Eskom; measures to curb public debt; and policy certainty to spur investment.
What it means
The focus should be on restoring SA’s working fundamentals, not on drafting a new growth plan
What Ramaphosa cannot do when he presents his next state of the nation address in June is repeat the mistake he made in February of talking for well over an hour and trying to cover all bases.
Ruthless prioritisation is required. The focus has to be on addressing the basic fundamentals — restoring state capacity and the public finances, fixing electricity and other network infrastructure, and providing the policy clarity and coherence to raise confidence and spur investment.
In addition to tackling these mega-issues, Ramaphosa should seek some quick wins around, for example, visa reform and the spectrum auction to generate a sense of momentum and reignite confidence.
The announcement last week by energy minister Jeff Radebe that small power-generation projects will be given the regulatory go-ahead is a good example of the kind of reform SA needs to improve the business environment.
In sum, though confidence and growth should pick up in the short term under a cleaner, more credible government, SA will have to undertake substantial economic policy reforms to sustain rapid growth.
If Ramaphosa is unable to overcome SA’s deeply embedded political and capacity constraints, the economy will fail to grow fast enough to achieve fiscal and social sustainability and prevent further ratings downgrades in the coming years. This will make the mountain back to prosperity even harder to climb.