IN THIS WEEK’S BOTTOM LINE

CONTRIBUTED BY NICK DOWNING | OVERBERG ASSET MANAGEMENT

South African confidence is riding the crest of a wave. Not only have the Springboks brought home the Webb Ellis trophy to the delight of nearly all South Africans, the government’s programmes of economic structural reforms and initiatives are gaining momentum.

Quick on the heels of his second Investment Conference, President Ramaphosa launched the Tshwane Automotive Special Economic Zone (SEZ), utilising 162 hectares of idle municipal land. The Ford Motor Company is the anchor investor with an investment of R3 billion, initially creating 7,000 jobs. A further nine companies have confirmed they will establish facilities by January 2021. Additional SEZs will be set up in Gauteng, in the West Rand, Ekuhuleni, Sedibeng and Johannesburg developmental corridors, luring investors with incentives, putting out the red carpet rather than red tape. SEZs have been so effective in promoting the vehicle manufacturing industry, that the government will be rolling out the SEZ model to other industries, in particular textiles, clothing and footwear, and agricultural processing, food and beverages, and logistics, rail, capital equipment and machinery.

Ramaphosa’s Investment Conference highlighted South Africa as the ideal launch pad for businesses tapping into the broader African market, made all the more relevant by the signing this year of the African Continental Free Trade Agreement (AfCFTA). Signed by 54 out of 55 countries in Africa and commencing in July 2020, the trade agreement will cover a population which by 2040 will be bigger than China and India combined. Member countries have pledged to cut trade tariffs to zero on 90% of all goods. Currently, only 18% of African exports are traded within the continent compared with 60% in Asia. The scope for growth is huge. The UN Economic Commission for Africa forecasts a 50% increase in intra-continental commerce in four years. To facilitate increased trade, the demand for infrastructure will surge, comprising road, rail and urban development. At the African Investment Forum hosted last week in Johannesburg by the African Development Bank and Infrastructure Consortium for Africa, it was announced that infrastructure investment commitments in Africa exceeded $100 billion in 2018 for the first time, rising year-on-year by a massive 24%. This figure can only grow under the auspices of the AfCTFA.

These and other initiatives, including the Integrated Resource Plan, the Renewable Energy Independent Power Producer Programme, allocation of broadband spectrum, and repeal of visa constraints, are encouraging. Furthermore, implementation risk is low.

However, the government needs more than initiatives. Significant structural reforms are required, first and foremost to stem the rising tide of expenditure on public sector wages. This is the elephant in the room and at the root of Eskom’s survival. Does the government have the spine to follow the example of the great economic reformers of the 20th century, China’s Deng Xiaoping, Singapore’s Lee Kuan Yew or Britain’s Iron Lady, Margaret Thatcher? Moody’s credit rating agency appears to think not. This contributed largely to the institution’s decision to lower its rating outlook for South African sovereign debt from “stable” to “negative”, paving the way for a rating downgrade to junk status.

Moody’s attributed its change in outlook, not just to the deterioration in South Africa’s fiscal strength but also to “the reform obstacles that the political landscape represents. The history of political infighting that has generated policy uncertainty in the past remains.” Despite Ramaphosa’s ascendancy to the leadership of the ANC in December 2017 and the ANC’s decisive victory in the national elections in May this year, his government lacks the authority to implement unpopular but essential reforms. The government’s lack of authority is showcased in Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement, where instead of prescribing difficult policy decisions, he instead made a set of proposals. Proposals, while well meant, will not achieve what is required. The country needs decisions, an action plan and steadfast implementation.

SAA has announced the bold step of laying off 900 staff, around 20% of its workforce, to cut costs and improve productivity. Perhaps this is a signal of things to come at Eskom and other state-owned enterprises. We will be watching closely for signs that the government is committed to taking the bitter medicine required to restore confidence, not just among the credit rating agencies but at street level and in the boardrooms of South Africa’s private sector.

Read More: Overberg Market Report 19 November 2019