Ramaphosa sparks a brighter SA outlook
The rand has strengthened by more than 10%; the market is pricing in interest rate cuts and has priced out a ratings downgrade. But how much have prospects for SA’s real economy truly changed over the past month?
A lot, if the ANC’s birthday statement and ensuing television interviews with the governing party’s new president, Cyril Ramaphosa, are anything to go by. Here is a man who speaks the language of economic growth and investment, understands the trade-offs involved and can convey these in an articulate and thoughtful manner.
Of course, he will be constrained in his ability to implement new approaches to economic policy by the divisions in the party and within his top six team. But his party colleagues would have had to have signed up to the birthday statement, which had a tone and economic emphasis quite different from those of the recent past.
“Our vision is an economy that encourages and welcomes investment, offers policy certainty and addresses barriers that inhibit growth and social inclusion,” said the statement, more than a third of which was devoted to the economy — and which declared 2018 to be the year of renewal and unity, but also, most unusually, the year of jobs.
Ramaphosa’s social-pact approach was high up there, with an emphasis on collaboration between the government, business and labour to promote investment and job creation.
So too was a commitment to urgent action to fix state-owned enterprises (SOEs) and expose and prosecute the corruption that had “undermined [the] government’s programmes to address poverty and unemployment, weakened key institutions, discouraged investment”.
Critics have highlighted the policy contradictions in the statement — calling for investment while committing to land expropriation without compensation, for example — but even the more controversial of the proposals are carefully circumscribed and Ramaphosa used his television interviews to refine the message.
Though economists, political analysts and rating agencies have cautioned against euphoria, the rand’s rally continues and there’s little question there will be what one economist calls a “Cyril spurt”, at least in the short term.
Inflation in 2018 is expected to come out somewhat lower than previously forecast, helped by the stronger exchange rate, as well as lower food price inflation and likely lower-thanexpected electricity price hikes.
On some economists’ revised forecasts, average inflation could come out below 5%. That should allow scope for a couple of rate cuts, though not necessarily at this week’s monetary policy committee meeting, where the committee will surely again highlight the risks to the rand and to its inflation forecast. Rate cuts could provide a bit of a boost to consumer spending, even though tax hikes in 2018 will limit that.
But combine the rate cuts with the ANC conferenceinspired confidence bounce, and the 2018 economic growth rate starts to look quite a bit better than it did a month ago.
Economists are revising up their forecasts modestly. Elize Kruger, of NKC Economics, has lifted her forecast from 1.4% to 1.7% and while the pessimists are still closer to 1%, the optimists are closer to 2% for 2018. But nobody is yet close to the 3% target Ramaphosa said in 2017 he would like to see in 2018. Nor is it clear what will happen in 2019.
That’s because the risks to the rand and the growth rate are as formidable as ever. Most immediately, there is the risk that Eskom could implode and default on its debt – and there is the fiscal challenge, with the national budget just weeks away on February 21.
It’s at least possible that the R51bn revenue hole could have grown even larger, and even if it hasn’t, it is hard to imagine how the finance minister is going to find the more than R80bn in fiscal consolidation measures the government promised before President Jacob Zuma and the ANC added at least R15bn more to this in free higher education promises.
Even a slightly higher growth rate will flatter the deficit and debt ratios, so a Cyril spurt could help – but only a little. The government will still have to find massive spending cuts in what is effectively an election year, one in which public servants are demanding pay increases well above what has been budgeted. And it will have to implement significant tax hikes in a year in which it surely can no longer avoid the last resort — a hike in the valueadded tax rate.
Ratings agency Moody’s Investors Service is due to pronounce after the budget on whether it will, finally, junk SA’s rating, which would prompt large capital outflows and put pressure on the rand.
The Eskom and fiscal risks make it hard to see how a Moody’s downgrade can be avoided — “unless Ramaphosa can demonstrate some pretty quick and big political and policy wins”, says Absa Capital economist Peter Worthington.
Deep damage has been done to institutions such as the South African Revenue Service, the SOEs and law enforcement institutions. While Ramaphosa could install good people to repair these institutions, the task would take years. For now, markets will be inclined to give him the benefit of the doubt.
EVEN A SLIGHTLY HIGHER GROWTH RATE WILL FLATTER THE DEFICIT AND DEBT RATIOS, SO A CYRIL SPURT COULD HELP — BUT ONLY A LITTLE