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Decoding the 2019 State of the Nation

President Ramaphosa presented an ambitious array of initiatives to improve the SA economy, highlighting the fight against corruption and the restructuring of Eskom.

Kevin Lings

Kevin Lings

Chief Economist


Kevin joined then-Liberty Asset Management as an economic analyst in 2001. As STANLIB’s Chief Economist, he is responsible for domestic and global economic research and forecasts. Kevin also provides input into STANLIB’s asset allocation processes and provides relevant economic research for our Fixed Income, Property and Equity teams.

On Thursday, 7 February 2019, the President of South Africa, Cyril Ramaphosa, delivered his second State of the Nation Address (SONA) since taking office on 15 February 2018. Ahead of local and international media speculation spurred debate about the likely content and tone of the President’s speech, especially ahead of this year’s National Election.

This debate, unsurprisingly, highlighted the need for government to urgently address a number of key challenges facing the country. These include uncertainties surrounding key economic and social policies that have been stifling private sector fixed investment, the need to accelerate the reform of key State Owned Enterprises (SOEs) such as Eskom, steps to improve the efficiency of government administration including a reduction in the size of the cabinet and the number of government departments, embarking on the process of prosecuting people involved in corruption, initiating private/public partnerships in order to kick-start infrastructural development and further encouraging private fixed sector investment.

The South African economy has struggled to achieve any meaningful economic growth over the past nine years, despite a relatively positive global economic backdrop. Instead, the South African economy has decoupled from the performance of the world economy, averaging growth of a mere 1.6% over the past nine years and a mere 1.3% in the past four years. This underperformance is reflected in rising levels of unemployment, increasing tax revenue shortfalls, depressed levels of consumer and business confidence, a protracted fixed investment recession in the private sector and credit rating downgrades.

Without a sustained pick-up in economic growth, the fiscal authorities are going to find it increasingly difficult to meet their budget projections and the country will continue to face the risk of additional credit rating downgrades, rising unemployment and further social tension. Moody’s remains the only major credit rating agency to assign South Africa an investment grade rating for both its long-tern foreign debt as well as its long-term domestic debt. They will next review South Africa’s credit rating at the end of March 2019.

President Ramaphosa delivered an optimistic assessment on the outlook for the South African economy, suggesting that significant process has, and will be made in key areas of economy activity, government service delivery and the functioning of society. Many of these claims can and will be challenged, especially since the undertone of his remarks do not correspond with the current performance of the economy, especially within the household sector.

In order to achieve a better economic outcome, the President indicated that government is going to focus on five urgent tasks. These are:

  • Inclusive economic growth and job creation
  • Improve the education system and develop the skills that country needs now and into the future
  • Improve the conditions of life for all South Africans, especially the poor
  • Step-up the fight against corruption and state capture
  • Strengthen the capacity of the state to address the needs of the people.

In discussing how these five broad tasks are going to be accomplished, the President presented an extremely ambitious array of initiatives ranging from increased exports of manufactured goods, more competition in industry, improved tourism, introduction of private/public partnerships, increased housing development, better education outcomes, the creation of special economic zones, reforming key State Owned Enterprises, substantially improving the ease of doing business, extending youth employment incentives, land redistribution (including land owned by government in urban areas), infrastructural development, and progress in the fight against corruption.

While the intention of these initiatives is to be applauded, it remains an overly ambitious list of undertakings. This is probably to be expected two months ahead of a National Election, but clearly the risk of once-again creating unrealistic expectations that lead to further disappointment is very evident. In that regard the speech can be criticised for simply announcing another list of tasks and initiatives without fully understanding or explaining why all the previous plans have not been fulfilled. The speech also lacks a point of focus to directly lift business confidence, investment, growth and employment.

One of the key stand-out features within the President’s speech is a clear intention to restructure Eskom, acknowledging that the institution is in crisis. There appears to be an acceptance that the survival of Eskom (and probably many other SOEs) will require private sector involvement. In particular the President indicated that:

  • Where SOEs are not able to raise sufficient financing from banks, from capital markets, from development finance institutions or from the fiscus, the government will need to explore other mechanisms, such as strategic equity partnerships or selling off non-strategic assets.
  • In helping Eskom, government needs to safeguard the national fiscal framework, achieve a positive impact on the sovereign credit rating, and pay attention to the rights and obligations of Eskom’s funders.
  • Government needs to take steps to reduce municipal non-payment and confront the culture of non-payment that exists in some communities.
  • Government will support Eskom’s balance sheet, without burdening the fiscus with unmanageable debt. The Minister of Finance will provide further details on this in the Budget Speech on 20 February.
  • Eskom will develop a new business model, which will include establishing three separate entities – Generation, Transmission and Distribution – under Eskom Holdings. It is hoped that this will enable Eskom to be able to raise funding for its various operations much easily from funders and the market.

Overall, the key points the President chose to emphasis in the speech, especially the fight against corruption, and the restructuring of Eskom, together with the tone, and the style of delivery should, on balance, help improve consumer and business confidence.

The focus will now shift to the content of the National Budget that is scheduled to be presented on Wednesday, 20 February and then the outcome of the National Election on 8 May 2019. Hopefully, the South African economy can start to make more meaningful progress after nine years of disappointment.

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