Markets are watching state’s moves closely
The rand is down more than 5% against the dollar over the past month, and on Monday fell to its weakest level since the Ramaphosa rally began with December’s ANC election, joining other emerging market currencies that have been trashed by dollar strength and rising US interest rates.
Foreign investors have turned net sellers of SA’s local currency bonds, selling a net R4bn for the year to date following a sharp sell-off last week, whereas in 2017 they were net buyers (of R39bn). This is in a context in which foreign ownership of local bonds had risen to record highs, making SA particularly vulnerable to a further sell-off.
None of this is a crisis. Markets are volatile and the rand has been up one day, down the next, and while bond investors have, disturbingly, been net sellers, equity market investors have been net buyers of South African stocks. However, the negatives of recent weeks have highlighted the extent to which SA’s fortunes are dependent on global investor sentiment.
The positive sentiment towards the Ramaphosa presidency has cushioned us, but if the tide of global sentiment towards emerging markets goes out, SA’s vulnerabilities will be exposed — especially if investors lose confidence in the new administration’s ability to deliver on reforms it has promised to boost investment, growth and jobs.
What are those reforms? Structural reforms are needed, but that means different things to different people. Some of the measures that go by the name are more short-term fixes than fundamental longerterm changes.
Ask the Treasury for a list and you will likely be referred to page six of the February budget review, which offers a nice focused list of reforms it estimates could lift the economy’s trend or potential growth rate to 3.5% to 4%, from the current 1.5%, all captured in a “waterfall” diagram showing how much each reform could contribute. That includes 0.6 percentage points each from reforming telecommunications and lowering barriers to entry by tackling anticompetitive practices. Improved confidence, transport reforms and enhancing labour-intensive sectors such as tourism and agriculture make up the rest.
The list of confidenceboosting measures, which goes back to former finance minister Malusi Gigaba’s somewhat random 14-point list of July 2017, includes fiscal consolidation and managing state-owned enterprise (SOE) risks, along with creating policy certainty. Depending on who you ask in the Presidency, whose emissaries are out there looking for $100bn in investment over the next five years, SOE reform might top the list, along with tackling corruption and addressing policy and political uncertainty in areas such as the Mining Charter and land.
But President Cyril Ramaphosa’s speeches, such as his “new deal” speech and his state of the nation address, have also promised a broader, longer-term list of reforms that includes reindustrialising the economy and transforming it by opening it up to new players.
Rating agencies and financial market investors would tend to emphasise making the public finances sustainable, which would include getting the public sector wage bill under control and sorting out the SOEs, but they are also looking to measures that would boost growth. S&P Global talks about opening up labour and product markets; it has flagged SA’s “rigid labour market” as a key constraint and may do so again in its six-monthly update on Friday. But poor education outcomes and skills shortages are high on its list of constraints — as they are in a World Bank systematic country diagnostic, which puts insufficient skills top of its list of constraints to reducing poverty and inequality.
Second, interestingly, is the skewed distribution of land and productive assets, and the World Bank zeroes in on “weak titling” and weak property rights, not only for the poor in rural areas and townships but also in the third Mining Charter and the land debate.
In a report on Ramaphosa’s “new deal”, Goldman Sachs says the market has yet to price in structural reforms because of how confused and contested the economic policy space is, inside the government and the governing party as well as outside it. Though Goldman Sachs’s growth forecasts for the next couple of years are at the optimistic end of the scale, it emphasises that the largest investor concern remains political risks.
Essentially, the question is whether Ramaphosa can solidify his grip on the party and take on the unions, as well as articulate specific policies to boost growth and employment.
Arguably, the reforms his administration has tended to focus on are less structural and long term than urgent and immediate: corruption, SOEs, fiscal consolidation. But markets are closely watching the way it deals with the immediate issues to see whether it is serious about more structural ones: whether the government can hold the public sector unions to a fiscally sustainable settlement is seen as an important test not only of whether it can deliver on fiscal consolidation targets but whether Ramaphosa will have the will and the support to implement reforms that organised labour and many in his own party may not like.
Unless he can get them on board, he won’t be able to please those bond market or currency investors either.