After an EFF-induced 90-minute delay and a historic 10-minute suspension, the joint sitting of Parliament and the rest of the nation finally got to hear what President Ramaphosa had to say in the 2020 State of the Nation Address (SONA). To some it was a message of hope, to others a message of unity. It is safe to say that we are all unified in our hope that this SONA and the 2020 budget will lead to a stabilisation in the precarious fiscal position via an improving growth outlook and reduced fear of serial rating downgrades.
Given that we South Africans are a resilient bunch, we will start with what we thought were the low points – outside of the EFF disruptions – and move on to the high points – outside of establishing a regulated and (hopefully) tax-paying cannabis industry.
Low points – in extra time
The SONA was relatively light on detail regarding the ongoing “distress” at numerous state-owned enterprises (SOEs). While the role of SOEs in the developmental state was a key focus, they are far from stable and so will not be able to fulfil this mandate without ongoing bailouts. That the SONA accepted load-shedding as part of day-to-day life is in our view a function of the election being behind us rather than necessarily showing non-interventionist support for the new Eskom management. Similarly, the reference to SAA’s business rescue practitioners’ plans being due in “the next few weeks” does not negate the fact that the government has come out against the favoured restructuring and required retrenchments.
The long overdue spectrum licence auction is meant to be concluded by the end of 2020, with the WOAN postponed until 2021. This has probably contributed to steadily falling estimates of the potential revenue that could be garnered from this source.
The NHI remains part of the policy packages based on “enthusiastic support…during public hearings”, which are meant to be concluded in the coming months. The constraint with regard to the NHI is not only whether the framework has merit, but also that it has so far not been properly costed and that it therefore remains unfunded. Additional concerns take the form of skills shortages in the medical industry, the potential exodus of existing skills, and with that the emigration of part of the tax base.
Finally, it seems that the government remains steadfast in its commitment to expropriation without compensation (EWC) given that the SONA pledges to table the Expropriation Bill once the Parliamentary process to amend Section 25 of the constitution has been completed. Yet this was touted as an election ploy rather than a “New Dawn” objective. Either way, the elevated policy uncertainty due to land reform and EWC has probably delayed much-needed investment and so prevented the creation of new jobs. Moreover, the bigger concern is the systemic risk to the financial system should expropriated property with nil compensation still be subject to a mortgage. It is still unclear whether the government would stand in. But this would nullify the whole point of EWC and amending Section 25. Hence, EWC will leave previous owners unable to service the outstanding debt. There is also a potential moral hazard that if owners were to suspect there might be EWC of their property, then they might stop servicing their debt. While the debt owed on farmland is a greater risk to an entity such as the Landbank, the fact that EWC extends beyond the agriculture sector puts a much larger portion of the banking sector’s mortgage assets at risk. Finally, we continue to read the proposed legislation as being limited to land, but the prior versions of the Expropriation Bill referred more generally to property.
Yet, as always, there could be an unseen benefit.
High points – it’s about time
The silver lining comes in the sequencing of the land reform agenda. The SONA notes that the Section 25 amendment process must first be completed, which means that it could be many months (potentially years if litigation were to ensue) before the Expropriation Bill will be tabled. More importantly, government will implement the key recommendations from the Presidential Advisory Panel on Land Reform and Agriculture, which is a parallel process to the amendment of Section 25. If successful, it will prove that Parliament need not amend Section 25 to give effect to large-scale land redistribution.
The biggest positive surprise in the SONA was the acceleration of electricity generation and procurement outside of Eskom. While some of the measures were adopted at the January ANC NEC Lekgotla, the timelines have been accelerated and the scope broadened. The Integrated Resource Plan 2019 will come into effect “shortly”, Eskom will procure emergency power from new projects and supplementary power from existing renewable projects, NERSA will accelerate the processing of embedded generation above 1MW (with no upper limit) for own use, municipalities can procure their own power from IPPs, and bid window 5 of the REIPPPP will be opened.
The Ease of Doing Business project may not be new, but the President gave concrete examples of improvements: water-use licences are being granted within 90 days; you can register a business on the Bizportal platform in one day; numerous market enquiries aim to lower input costs; and the Durban port is set for an overhaul.
Youth unemployment – a symptom of the constrained investment environment and skills mismatch – was the new focus in the SONA. The Presidential Youth Employment Intervention will implement six strategies over the next five years to absorb surplus, young labour into the economy. These are: 1) creating pathways to connect young people to the economy; 2) change how young people prepare for the workforce via shorter, flexible courses; 3) support entrepreneurship and self-employment; 4) scaling up the Youth Employment Services; 5) a Presidential Youth Service programme; and 6) leveraging 1% of the national budget to fund the initiative (more on this below).
All ministers will be signing performance agreements, which is notionally a positive signal. Taken alongside the wage freeze announced for Cabinet members in the 2019 MTBPS, this is setting an example for the broader civil service while probably also being a bargaining chip in the wage bill negotiation. Obviously, the detail of the performance metrics will help to determine whether this is merely paying lip service to government accountability or whether it will actually enhance the capacity of the state.
Policy implications – running out of time
The SONA has not entirely dashed our hopes for some fiscal consolidation in the 26 February Budget, but it has elucidated the numerous demands on state resources at a time when growth is faltering – both here and abroad. The President noted that government expenditure was being “misdirected” towards debt service and consumption and that the composition of spending needs to become more infrastructure-focussed.
The Budget will contain some expenditure cuts, but the negotiations on compensation are ongoing. Similar to the social compact on sorting out Eskom’s debt burden, it is still too early to announce a solution to the bloated wage bill. This means that some of the consolidation will have to come from a recovery in growth – and the required implementation of reforms – and potential tax measures. Encouragingly, the SONA gives more explicit support to National Treasury’s reform proposals, but the quick wins already implemented have not yet lifted growth meaningfully.
That “National Treasury and the SA Reserve Bank are working together to ease pressure on business and consumers” should not necessarily be read as a prelude to aggressive rate cuts. Rather, it may reflect that the Treasury is not willing to increase tax rates further and/or that the SARB should continue to keep inflation at low levels to protect the spending power of the working class. The MTBPS already pencilled in R10bn worth of tax measures for FY21, but more will be needed in the absence of substantial expenditure cuts.
While the funding details of the youth employment initiatives will be revealed in the October MTBPS, the February budget would have to incorporate the headline numbers in the spending line. A 1% allocation from the main non-interest expenditure budget would total around R15bn in FY21, which equates to two thirds of the allocation towards Job creation and labour affairs for consolidated government. If it is a once-off funding mechanism, then the required reprioritisation will be less onerous than the fee-free tertiary education impact in 2018, but would still be felt as austerity across the departmental budgets.
The Sovereign Wealth Fund (SWF) and State Bank were seen as negative surprises in the SONA – this is not surprising as looting and VBS automatically come to mind – but these have often been mooted, with the State Bank an explicit ANC resolution. Moreover, these are potentially part of the negotiations within the ANC and between government and labour. The bottom line is that both will require funding.
A SWF is challenging when a country is running a structural current account deficit and persistent budget deficits, debt is heading towards 80%/GDP, and exports are relatively diverse. Potential sources to start the SWF could be government’s FX deposits (c. US$10bn) or sterilisation deposits (just shy of R70bn) with the SARB. Given the fund’s purpose is to share the wealth of the country, the Treasury could ring-fence mineral royalty proceeds or levy a special/wealth tax. However, these will generate only small amounts for the proposed fund and would leave a gap in the fiscus.
Conclusion – time is of the essence
The SONA continues the incrementalism and consensus-building that President Ramaphosa adopted since coming to power in 2018. Not only is it his modus operandi, but negotiation and compromise is how South Africa has evolved. Hence, we should continue to have tempered expectations that slow and steady will win the day. The constraint, as always, is time. A lot needs to be implemented successfully to reverse the fiscal course and prevent serial credit rating downgrades. While the SONA gave time stamps on many of the initiatives, we probably have 12 months, tops, to get off the slippery negative rating slope.