Ramaphosa has set the stage for a confidence-boosting Budget

JACOB Zuma resigned as president on February 14, and Cyril Ramaphosa was announced as the new President of South Africa. This will have a positive effect on the economy as Ramaphosa works on rebuilding investor confidence. We are not out of the woods yet, and we should be aware of over-optimism.

LAST YEAR’S EVENTS

The backdrop to the 54th African National Congress’s national electoral conference was an economy that experienced large swings over the preceding months within a broad negative trend induced by negative political sentiment over several years.

In October, the Medium-term Budget Policy Statement (MTBPS), which effectively put paid to fiscal consolidation, led to the downgrade of South Africa’s local government bonds to sub-investment grade by Standard & Poor’s.

Although Moody’s Investors Service kept its investment-grade rating unchanged, it placed South Africa on credit watch, meaning that a downgrade decision within three months could lead to the country’s expulsion from Citigroup’s World Government Bond Index, an outcome that could trigger large-scale capital outflows and a severe fall in the rand.

The worst fears faded a little last November, causing the rand to retrace to about R13.50 to the dollar by early December, from the R14.50-plus level at one point after the MTBPS. Similarly, bond yields eased back to below 9.2% (from a post-MTBPS level of about 9.5%), although still well above the 8.5% before the MTBPS.

Then came the ANC electoral conference in December. Despite some delays and worries around the voting process, markets took heart from the election of Ramaphosa as party president.

Even before the conference, markets began partly to price in the election of Ramaphosa. The rand moved from R13.50 against the dollar in early December to R13.22 on the eve of the conference and to R12.71 by the end of the conference. The currency strengthened further to R12.38 at the end of 2017.

Announcements regarding a new Eskom board and action on corruption have led to further improvements in confidence.

ACCELERATED MOMENTUM

The speed with which events have moved – mostly in a positive direction – since the start of the year has been surprising.

Apart from the Eskom board, the Hawks have initiated a number of interventions on fighting corruption through raids and arrests. The transition from President Zuma to President Ramaphosa has taken most by surprise, and it is now up to the new president to maintain this momentum.

Clearly, our new president has his job cut out for him. Not only does he need to restore confidence in the country and the economy, but he also needs to unite his party and the country behind a common goal. This will not be easy, and it is likely that we will experience some pain in this process before we see the benefits. Ramaphosa will need to convince his party, his voters, citizens and investors of this.

He has set the stage for next week’s Budget, which will need to be a lot tougher than what we have seen in the recent past.

There are various issues that will be closely watched by voters and investors alike. These include: • The fight against corruption; • The energy mix needed in the country;

• Mining regulation, which has become a key issue in terms of investor sentiment;

• A crackdown is needed at the South African Revenue Service and the National Directorate of Public Prosecutions;

• The governance of state-owned enterprises needs to be addressed, because it presents a risk in terms of government finances; and

• The National Development Plan (NDP), which has been gathering dust in recent years as political in-fighting shifted attention away from this key policy plan. The NDP needs to be implemented quite strongly in order for the economy to lift its head on a more sustainable basis.

Ramaphosa will likely expand on his “New deal for jobs, growth and transformation” that he presented late last year. This included the creation of “decent” jobs, a focus on driving growth and investment, the rejuvenation of local investment and the development of small business, the implementation of a macroeconomic policy that promotes growth and secures economic sovereignty, improved access to quality, relevant education, the revitalisation and expansion of our manufacturing capacity, maximising the impact of our infrastructure build, and restoring state-owned enterprises as drivers of economic growth and social development.

The president will need to take us into his confidence. Given recent developments, we can expect a confidence-boosting Budget.

Johann Els is the head of economic research at Old Mutual Investment Group.