Earlier this week South African Airways (SAA) was placed into business rescue, a form of bankruptcy protection from creditors to effect a turnaround.
This is a change in government’s approach to distressed state-owned enterprises, as it means it will surrender control of the entity in favour of a business rescue team.
But the move into business rescue came with an extra R2bn in bailout from National Treasury, on top of the R57bn since 1994, and a R2bn loan from other creditors.
Will this result in the sell-offs, job cuts, and the cost-cutting that are needed?
Interests close to the ANC could be threatened. Unions are threatening strike action over job losses, and cost-cutting on procurement may mean a threat to the interests of suppliers, including empowerment middlemen.
The unfolding saga at SAA could be the signal for an economy-wide structural reform programme. If there is success at SAA, the government could be emboldened.
South Africa is running out of time to deal with its mammoth economic problems. Almost flat economic growth, rising unemployment, low business confidence, a massive budget deficit, strong capital outflows, poor government service delivery, poorly managed state enterprises with enormous debt, and corruption that to a large extent goes unpunished are all mostly self-inflicted.
Given the level of SA government debt and high unemployment, there is a narrowing set of policy options. If we are to see a changed stance it will be in Finance Minister Tito Mboweni’s Budget Speech in February next year, otherwise the bet is that budget cuts and reform will be off the agenda.
Failure to cut government spending and insufficient or no reform will mean junk status for SA debt, forcing foreign money to drop SA from many index-linked funds, with a consequent higher borrowing rate for the country.
A failure to sufficiently cut budgets and reform ideologically-driven policies are a path to the meltdown experienced by Venezuela and Zimbabwe. The result is shortages of food, commodities, drugs, machine parts, tools, and much else, plus corruption, the collapse of government services, economic shocks, and ultimately hyperinflation. In an environment of decline, it becomes more likely that the ruling party will implement populist measures to maintain support. In South Africa, this would include National Health Insurance, Expropriation without Compensation, and prescribed assets.
The costs of reforms are high for entrenched interests, but the rewards can be immense. Successful comprehensive reform can boost growth by more than 7 percent over a six-year period, according to the International Monetary Fund (IMF).
The country does not currently have to go to the IMF, as foreign exchange reserves are adequate and foreigners are still taking up government debt. Should there be massive capital outflows and an external shock, all that could change.
Reforms the IMF would like to see in SA are a restoration of fiscal discipline to contain the build-up in debt that could exceed 70 percent of GDP in 2022.
The budget deficit has to be cut to around 3 percent of GDP from its present 6 percent over four years. Cuts would have to focus on public sector pay, which, unusually, is above that in the private sector in South Africa. Bailouts of state-owned enterprises, none of which help economic growth, will have to end. State-owned companies will have to be restructured, liquidated, or privatised. Decentralized wage bargaining could see downward pressures on union wages, but would do much to fight unemployment.
This would antagonise union allies and the beneficiaries of patronage. But there would be winners in the form of higher growth and reliable electricity provision, and those who lost jobs would be in line to get jobs at privatised entities.
President Cyril Ramaphosa’s need to consolidate power after he came to office in late 2017 has been one of the widely advanced reasons for why little has happened so far. Factionalism in the ruling party may well explain why reform appears stalled, affecting business sentiment.
Is it politically impossible for SA to reform?
Last month, credit rating agency Moody’s gave South Africa a negative outlook, pointing to probable junk status as ‘resistance to reforms from key stakeholders limit the government’s room to adopt and implement structural reforms’.
There is no outspokenly pro-reform wing in the ANC. The pragmatic elements in the ANC in the era of President Thabo Mbeki no longer have power in the party. In 2006/7 and 2007/8, the last Mbeki-era budgets generated a government surplus.
Finance Minister Tito Mboweni has put structural reform on the agenda with the launch of a Treasury document, ‘Economic Transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa.’ Turnarounds of network industries like power generation and telecommunications, fostering greater competition, and creating conditions for labour-intensive sectors are key proposals.
As is often the case with reform in many countries, it is the technocrats – in South Africa’s case, the Treasury and the South African Reserve Bank – who support this plan, with no evidence of real support from the party. ANC pressure has meant that the idea of privatising Eskom’s coal-fired generating plants has been taken off the agenda.
The current centre of gravity in the ANC alliance of unions, communists, populists, and party patronage-seekers is around radical economic transformation. That stands for a big state, resistance to privatisation, continued patronage, populism, compromising property rights, and threats to Reserve Bank independence.
There are signs of momentum on reform, but these don’t amount to a convincing story. The recent Medium-Term Budget Policy Statement confirmed the dire fiscal position, but did not come up with remedies. However, the South African Revenue Service has been strengthened, mining exploration regulation improved, visa restrictions eased, steps have been taken towards ease of doing business, and there are plans to open up more spectrum to pave the way for improved broadband.
In another show of a bud of reform, President Cyril Ramaphosa did what he thought was right for Eskom. He appointed Andre de Ruyter, who happens to be white, as the CEO. In defending the move, Ramaphosa quoted Deng Xiaoping, the Chinese Paramount Leader who pushed through far-reaching market reforms from the late 1970s onwards. Ramaphosa’s invoking Deng’s rationale – ‘it doesn’t matter if a cat is black or white as long as it catches mice’ – raises hopes.
Prosecutions for corruption will be an important part of building the legitimacy for reforms. In recent weeks, a former state security minister, Bongani Bongo, the former Mayor of eThekwini, Zandile Gumede, and ten individuals in the Eastern Cape have faced charges. Yet this week, the ANC caucus elected as Mayor of Johannesburg, Geoff Makhubo, who allegedly had shares in Trillion Capital, a Gupta-linked firm involved in state capture.
In The Prince, Machiavelli wrote that ‘there is nothing more difficult and dangerous than an attempt to introduce a new order of things…’ And the 19th century French political thinker Alexis de Tocqueville warned of the ‘dangerous moment’ for bad governments being when they began to change.
The best advice to politicians might well be, “Just do it”. But that still begs questions about timing, the means, and the sequence. There is more art than science to managing the politics of reform, but there are general guidelines.
Reform programmes need a simple narrative that shows fairness and can bring some early positive results. In SA’s case, it is imperative to get across that the alternatives to reform are worse, and that the culprits of state capture are facing justice. An end to electricity load shedding, and cheaper broadband prices, would also help the case, as would job creation. Assurances about social grants and improving state healthcare delivery are vital. Keeping privatisations transparent would also be important after years of state capture.
The optimal moment to reform is during good economic times or immediately after an election. The period of “Ramaphoria” has passed and the election mandate in May was never seized as the moment for reform. But crises very often bring on reforms. The government could well draw a line and say, no more bailouts, load shedding, or excessive union wage demands.
Reforms can sometimes take up to three years or more to deliver. However, an analysis by the IMF suggests that wide-scale reforms entail electoral costs only when implemented in the year before an election.
So, with an eye on the local elections in 2021, the ANC could pick up courage early next year. Any optimism about SA reform so far must rest on politics being about the art of the possible, rather than hard evidence.
The views of the writer are not necessarily the views of the IRR.
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