#SONA2018 Economics wish list for South Africa

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South African President Cyril Ramaphosa will deliver his maiden State of the Nation Address (SONA) on 16 February 2018.

The annual speech kicks off the Parliamentary year and focuses on the country’s current political and economic situation.

Regarding the latter, South Africa experienced deteriorating economic conditions during 2014-2017, and there is great hope for an improvement in economic growth during 2018 under the new administration.

President Ramaphosa has elevated expectations of his first SONA after saying late in 2017 that South Africa “must act now – boldly, decisively and collectively – to change the trajectory of our economy”.

One of his immediate priorities is to restore confidence among local and foreign investors. Promising a “New Deal for South Africa”, President Ramaphosa is aiming for economic growth to rise to 5%, a level last seen a decade ago, by 2023.

The rand exchange rate – which has been increasingly sensitive to domestic political developments over the past few years – welcomed the election and forthright words from the new African National Congress (ANC) leader. The South African currency appreciated from R13.70/$ in mid-December 2017 to below R12/$ during the early part of February. A firmer rand improves the outlook for South African consumers through lowering the cost of imports and associated inflation. Indeed, the South African Reserve Bank (SARB) was able to lower its inflation forecasts during January in part due to a stronger rand.

South Africa’s 10-year bond yield declined from 9.3% in mid-December 2017 to 8.3% during the last week of January 2018. Bond traders had since the Medium-Term Budget Policy Statement (MTBPS) been pricing in further downgrades in South Africa’s local bond ratings that would result in it being excluded from the Citi World Global Aggregate Bond Index (WGBI). This could result in more than R100 billion in foreign money exiting the domestic capital market.  However, the decline in bond yields since President’s Ramaphosa’s election as ANC leader indicated that investors were expecting him to at least stem the downward trajectory in sovereign ratings.

In order to further boost confidence and reignite economic growth, President Ramaphosa will have to be decisive in the SONA in setting out his economic plans for the next year. PwC economists would like to see the following economic issues addressed in #SONA2018:

Radical economic transformation has been part of South Africa’s economic policy discourse for the past two years. President Ramaphosa has also committed himself to accelerate the transfer of ownership and control of the economy to black South Africans towards supporting economic development and a decline in income inequality. However, the strategies behind this economic transformation remains opaque: Investor confidence will depend on having more information on how the economy would be transformed.

Empirical research shows that education is the biggest contributor to poverty alleviation in developing countries by increasing the employability of labour. In South Africa, the unemployment rate of people with a tertiary qualification is less than half of that for adults with only primary education. This makes the funding of tertiary education not only a fiscal matter, but one of much greater influence on the South African economy. Students and tertiary institutions need more clarity over the phasing in of subsidised higher education over the next few years.

President Ramaphosa’s “New Deal” is planning for the creation of one million jobs over the next five years, with the manufacturing sector set to take the lead. The approach is fitting to South Africa’s challenges: history has shown that factory employment played a very important part in economic development in countries that have seen periods of high and sustained economic growth since the end of World War II. The president should elaborate on his plans for incentives – e.g. the creation of special economic zones (SEZs) – aimed at boosting the factory sector.

The restoration of State-Owned Enterprises (SOEs) as drivers of economic growth and social development is a key commitment set out in a 10-point action plan revealed by President Ramaphosa in November 2017. The importance of energy security and transport efficiency to revitalising economic growth in the country cannot be underestimated, with SOEs playing a significant role in these sectors. Financially sound SOEs will reduce pressure on the fiscus and support economic growth going forward. The SONA should reflect on progress made so far and further efforts.

Investment in the mining industry – one of the largest job creators and export earners in the country – was during 2017 hamstrung by policy uncertainty in the sector. The Chamber of Mines commented earlier this month at the Mining Indaba that it expects mining investment to rise this year if the Ramaphosa administration is able to offer more regulatory certainty. For this to happen, the stalemate between the Government and mining industry regarding the Mining Charter needs to be resolved.

Apart from drought conditions weighing on crop production, the farming industry (and rural areas in general) are also experiencing regulatory uncertainty which is hampering the normal functioning of the agricultural sector. There is concern about property rights – a key requirement for long term economic development – in the sector after President Ramaphosa indicated in December 2017 that he is in favour of expropriation of land without compensation, while at the same time indicating that this land reform must be done without undermining agricultural production and food security. SONA 2018 should elaborate on this.

By addressing these issues, President Ramaphosa will maintain the momentum that he has been able to build since mid-December. He needs to build on his comment at the World Economic Forum (WEF) 2018 in Davos that “the wheels of change are moving now and they are going to start speeding up”. Foreign stakeholders are already listening to this message. SARB Governor Lesetja Kganyago commented at the WEF: “Last year at this time in Davos, I was trying to look for people to talk to and convince that South Africa is worth investing in. This year, I’m having a lot of people come to me saying, ‘Hey, it looks like a lot of things are changing in South Africa. Where are the opportunities?’”.

The outlook for the South African economy has improved with the ascent of President Ramaphosa to first the party leadership and now the leader of the national government. There is great anticipation that his “New Deal” will result in a collection of necessary reforms being made to the local economic space, including confidence-building solutions to economic policy uncertainty in areas such as mining and agriculture. It is believed that economic growth will improve over the coming 12 months on the back of these changes.

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Bontle Moeng is the Founder and Managing Director of BizNis Africa. Moeng has spent 15 years working in the digital and online media industry across Africa. She applied her trade at True Love magazine prior to discovering her passion for Investment news in key sectors across Africa. Moeng previously worked for ITWeb, Starfish Mobile Technologies, ITNewsAfrica, AVATAR Agency, eNitiate, Global Interface Consulting and Havas Johannesburg. Her primary focus is to provide solid and valuable content on investment opportunities for the ICT, Energy and Mining sectors across Africa. In addition, the online news publication assists global companies to expand their presence in Africa. Email: news@biznisafrica.co.za

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