Global economic sentiment is showing signs of improving in the aftermath of the US election and the positive clinical trial results of two Covid-19 vaccines.
And there is a degree of renewed hope among some in South Africa about our economic future. In recent weeks, South Africa has come up with new plans to deal with the growth in public debt, and President Cyril Ramaphosa has launched an Economic Reconstruction and Recovery Plan.
Is there now a basis for optimism?
Over the past month, the Rand has strengthened against the US dollar and foreigners are showing renewed interest in SA government bonds. The JSE has been buoyant since the start of the month, and the markets are now looking to the end of lockdowns. Some analysts, such as J.P. Landman, believe that there is now the political will and leadership in South Africa that is key to solving the country’s deep problems.
The end of the pandemic could be in sight and, with that, investors are prepared to expose themselves to greater risk and place more of their portfolios in emerging markets. Hence the slightly greater interest that is being shown in South Africa and other emerging markets.
The optimists point to Finance Minister Tito Mboweni’s commitment to curbing the growth in public debt through spending cuts and freezing civil servant compensation. The unions have said they intend to fight this, but at last there are some signs of the problem being addressed.
There is good news in the fight against corruption. One of the most senior ANC officials, the party’s Secretary General, Ace Magashule, has been charged with corruption and will appear in court in February next year. There have also been charges against officials further down the food chain. Meanwhile, the Zondo Commission on State Capture continues and may pave the way for further corruption charges.
Ease the pressure
Ramaphosa has a plan for new jobs and a mega infrastructure programme. There are also plans to allow more independent power producers to enter the generation market, which should ease the pressure on Eskom. The CEO of Eskom, André de Ruyter, says there will be an end to load-shedding in 18 months’ time.
Is all this sufficient for new positive thinking about the country’s future?
This new environment could allow Ramaphosa and his ministers to perhaps give a more bullish view at this week’s third annual SA Investment Conference. Government says it has already raised billions, and investors are on board.
What undermines the government case is that much has been planned over the years but very little implemented. We are now told that the reconstruction plan is all about implementation, although questions about financing are unanswered.
Before it embarks on grand schemes, South Africa will have to bring down its public debt as a percentage of GDP. This is currently at over 80 percent and the budget plan is to allow this to peak at around 95 percent in four years’ time. Without debt consolidation, the government will be highly constrained in raising capital for electricity production and infrastructure programmes, or in implementing a successful public jobs programme.
South Africa needs to grow to carry its high debt burden, and fast growth in the immediate future is out of the question. There will be an economic contraction of around eight percent this year and growth thereafter will face the primary constraint of load-shedding. All this puts tax revenue under pressure and therefore limits debt-service capacity.
Government is in a Catch 22. It cannot raise significantly more debt or offer massive debt guarantees for infrastructure projects, crucial for energy production, yet economic growth depends on these investments.
Yet to act decisively
Finance Minister Tito Mboweni has given many warnings about overspending and debt levels over the past three years, but has yet to act decisively. Cuts are promised in the budget to be presented next year. But will he be in a position to act on his warnings?
The government would like to freeze civil servants’ pay, and negotiations are presently under way. But what if the public servants, who are highly unionised in government, do not agree to a cut?
It is positive that the issue of public sector remuneration is now at least on the agenda, but it will have to be addressed for optimism to be well-grounded.
It is positive that the government is allowing Independent Power Producers an expanded role, but there is a trap, here. To raise finance, these producers will require government guarantees. Guarantees are part of the public debt burden and, given the existing commitments, the state is highly constrained in its ability to extend additional guarantees.
It is highly unlikely that load-shedding can be solved in the absence of Eskom turning around the mega disaster projects that were meant to be its state-of-the-art generating plants at Kusile and Medupi. Much of the Eskom coal-powered fleet is ageing and will have to be retired within the next decade, so Eskom’s base load will be highly dependent on these. Well-founded optimism would be based on convincing efforts to bring Medupi and Kusile to full capacity.
Hesitant and partial effort
So far, there has been no mention of reforms to the labour market, indicating a hesitant and partial effort.
Much of the ANC agenda – such as prescribed assets, nationalisation of the Reserve Bank, a National Health Insurance scheme, and a Basic Income Grant – seems to have been put on hold. But a month before the Investment Conference, the Expropriation Bill of 2020 was published in the Government Gazette. The big worries are that, under an Expropriation Act, municipalities would be able to determine the price of the property to be seized and the very limited rights to appeal of property owners. That cannot be good for investor optimism.
But what are investors saying?
Moody’s and Fitch, the credit rating agencies, gave South Africa a negative outlook, which points to further downgrades after the February budget. Come Friday, these two agencies are likely to actually downgrade South Africa. That means they are increasingly worried about the country’s ability to repay debt and are not persuaded by the October budget statement or the president’s recovery plan.
Worries
The bond market reflects these worries about South Africa’s longer-term ability to grow and repay debt.
Currently, the South African ten-year bond trades at nearly 4.67 percentage points above the two-year bond. That is way over the margin at which ten-year bonds trade over two-year bonds in Brazil (3.57 percentage points), and India (1.76 percentage points).
In short, the bond market is saying: ‘Bang vir die toekoms’.
[Picture: enriquelopezgarre from Pixabay]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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