Mon, 16 Sep 2019

Market participants are acutely aware of the apparent fissures within the ANC, which may disrupt attempts at reform, according to Arthur Kamp, investment economist at Sanlam Investments.

Accordingly, they may reserve judgement and are likely to look out for signposts to confirm President Cyril Ramaphosa's "mandate", including the composition of the Cabinet, in Kamp's view.

"At the forefront of the president's mooted reforms is a bid to encourage a surge in jobs producing fixed investment spending, including foreign direct investment - supported by a programme to bolster business confidence partly by improving the ease of doing business in South Africa and addressing governance and financial management issues at key public sector enterprises," said Kamp. "But, in addition to policy clarity and certainty, investors need to be assured that the lights will stay on."

Kamp referred to Ramaphosa's mention in his State of the Nation Address, of a plan to split Eskom into three separate businesses. The aim would be to isolate "the costly and inefficient generation component of the electricity supplier", ostensibly paving the way for Eskom's transmission business to purchase electricity from cheaper and more efficient producers, while also increasing usage of renewable energy, according to Kamp.

"The best plans are, nonetheless, likely to come to naught should South Africa not address the ever-present risk posed by its failed fiscal consolidation," commented Kamp.

"The contingent liability risk lurking in the extensive guarantees issued by the government on the debt of the public sector enterprises has come home to roost, culminating in a cumulative R69bn cash injection, if not more, by the National Treasury into Eskom over at least the next three years."

Eskom's turnaround imperilled as debt approaches R500 billion

Kamp said, even though Ramaphosa is expected to drive economic reforms, the developmental state model remains central to government's economic planning and the policy objectives of the ANC. This includes fee-free education and the proposed shift towards national health insurance, preclude a sharp reduction in spending.

"In any event, the Treasury appears committed to a gradual decrease in the relative size of the government's bloated wage bill, through natural attrition and voluntary retrenchment only," said Kamp.

"This suggests more revenue-generating measures are likely to be announced, while the possibility of prescribed assets is still on the table."

Kamp added that Ramaphosa is not in a position to ignore party policy, including the resolutions taken at the ANC's 2017 elective conference to pursue expropriation of property without compensation and nationalisation of the South African Reserve Bank (SARB).

In his view, a far more serious problem would, however, emerge should nationalisation of the SARB (if it occurs) adversely impact the independence of the bank.

"The SARB's mandate includes the pursuit of an appropriately low inflation target set by the Treasury, in support of long-term stability and sustainable growth. This requires the bank to act independently without fear or favour," said Kamp.

"Hence, while it seems fair to argue that the general election of 2019 may signal an end to South Africa's slide into economic policy uncertainty and depressed confidence, risks linger. Meanwhile, progress is unlikely to be smooth and will likely take time."

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