IN THIS WEEK’S BOTTOM LINE
CONTRIBUTED BY KIRK SWART | OVERBERG ASSET MANAGEMENT
Previous bottom lines pointed to the fact that South Africa needs structural reforms, not more initiatives.
The enormous public sector wage bill and wasteful expenditure at municipalities, departments and state-owned enterprises (SOEs) needs to be reformed to ensure economic growth going forward. The biggest elephant in the room is Eskom. Andre de Ruyter, the previous CEO of Nampak, was tasked to turn around Eskom`s fortunes. His appointment at the helm of Eskom has been received with mixed reactions. Although Mr de Ruyter might not have been the first choice, he has an impressive CV having been the CEO of Nampak for the last five years as well as working for Sasol in senior management positions for more than 20 years. Mr de Ruyter will oversee the process of splitting Eskom into the three divisions of Generation, Transmission and Distributions.
The crippling strike at South African Airways (SAA) was resolved. While Numsa and the SA Cabin Crew Association might feel they won the negotiation battle, they will only receive the 5.9% wage increase SAA initially offered. This is a massive victory for South Africa as both SAA and the government effectively drew a line in the sand regarding union demands. It seems as if the Ramaphosa slow poison is kicking in. SAA will now have to find the cash. This week sees SAA and its lenders in discussions to secure funding for the embattled airline. Minister of Public Enterprises, Pravin Gordhan issued a statement that the airline needs “radical restructuring”. It will be disappointing if government comes to the rescue of SAA with a loan. This will nullify the hard work that has been done to date. Sizwe Pamla, Cosatu`s spokesperson mentioned that the union will support partial privatisation of SAA and other SOEs.
Regarding monetary policy, the SARB must aim to loosen monetary policy in order to kickstart the economy. South Africa`s inflation rate declined to 3.7% in October 2019. This was below market expectations of 3.9%. Although the SARB kept rates on hold, a further weakening in the inflation outlook will force the SARB to cut interest rates going into 2020. The reluctance to cut rates could be an attempt to protect the currency. Protecting the currency via monetary policy might work over the short term but the relationship breaks down over the long term. If the benign inflationary environment continues into 2020, the SARB can lower the Repo rate from its current level of 6.5% to below 6%.
A further indication of the Ramaphosa slow poison is the arrest of former state security minister Bongani Bongo. Bongo, a Zuma loyalist, has been arrested on charges of disrupting the parliamentary enquiry into Eskom in 2017 by bribing an advocate. This high-profile arrest is what South Africans have been calling for. We can expect more corrupt individuals to have their day in court as Hermione Cronje, head of the NPA’s Investigating Directorate, assured South Africans that we “will see the work that has gone on in the background”. South Africans will need to show patience.
Recently South Africa dropped to 84 out of 190 countries when it comes to ease of doing business, according to the World Bank. For a country that desperately needs foreign direct investment, this is one area that the government should and can improve on. The World Bank cites “access to financing, corruption, inadequate infrastructure and weak governance” as the main culprits. The good news is that all these areas can be fixed and Ramaphosa knows it. These areas, along with stringent B-BBEE legislation, makes it very hard for South African businesses to flourish. It is advised that government award good B-BBEE practices, rather than punish those who do not comply.
Read More: Overberg Market Report 3 December 2019