Reform or rhetoric? Will the budget deliver?
Did the SONA (State of the Nation) address by President Ramaphosa mark a genuine shift to prioritising economic reform and a capable state, or just reluctant rhetoric to placate some of its GNU partners?
We have long held the view that as long as the ANC remains the majority party in the GNU South Africa will be unable to prioritise the necessary economic reforms to genuinely lift economic growth above its current 2% ceiling. Is this view outdated given the now anticipated pro-market budget on 25 February?
It would be rude not to concede that in rhetoric at least, there has been a notable domestic shift to prioritising economic growth and (equally importantly) outlining more tangible outcomes that can hold government accountable, from private public partnerships on infrastructure to greater pragmatism around service delivery and B-BBEE. The emphasis on logistics reform, electricity transmission expansion and collaboration with the private sector suggestions a recognition that ideological has not produced the desired results. There is also a clear shift in tone away from treating redistribution as the primary goal, and toward recognising that stronger economic growth is necessary to make redistribution sustainable.
The move by National Treasury last year to the new inflation target of 3% is a strong commitment to drive efficiencies in the economy and has been backed by the SONA speech, which will in all likelihood be reinforced by the subsequent February budget. A lower and clearer inflation anchor should, over time, support a structurally stronger currency and lower the cost of capital. If credible, it could catalyse fixed investment, which has remained stubbornly subdued for over a decade. Importantly, it also signals that macroeconomic stability remains a core pillar of policy, even within a complex GNU framework.
Meanwhile South African government bonds have rallied hard partly on improved domestic sentiment but also on the back of a weaker US dollar (benefitting most emerging markets) and a resource revenue windfall that has improved our terms of trade and revenue outlook. The compression in bond yields reflects not only global liquidity dynamics but also a belief that fiscal consolidation may be more durable than previously feared. Yet markets are forward-looking and often generous in anticipation. The real test will come when cyclical tailwinds fade, and structural reform must stand on its own merits.
Is the South African good news story then a slam dunk?
Hardly. Within the SONA there was both a welcomed emphasis on economic growth, public-private partnerships and operational efficiency; but at the same time an unwelcomed over-reliance on
the Presidency to drive reform, and a foreign policy agenda that still smacks of liberation politics rather than realpolitik realism.
We have yet to see the hard trade-offs in the February budget and whether there has been a genuine effort to prioritise infrastructure spend over the wage bill; let alone a significant and realistic increase in economic growth expectations to well above 3% p.a. Without expenditure reprioritisation, promises of infrastructure expansion will remain arithmetic rather than economic. Fiscal credibility ultimately hinges on politically difficult choices such as moderating public sector compensation growth, improving spending efficiency and broadening the tax base through growth rather than rate hikes.
And the continued liberation solidarity with Cuba, Western Sahara and Palestine gives no indication of how South Africa will thrive in a post-Bretton Woods world where middle income countries are vulnerable to superpower rivalry.
I started this article warning against viewing the world in binary terms. The world will always turn out messier than we hope for. But investors overexposed to the “good news” South Africa story not materialising may benefit from challenging their own internal assumptions and thinking around how to build a resilient investment strategy should SA do somewhat better than expected.
