SONA 2020: Time for the President to Make Tough Choices

Government needs to stop talking and start doing.

SONA 2020: Time for the President to Make Tough Choices

Ashrof Hendriks - GroudUp

President Cyril Ramaphosa’s 2020 state of the nation address was always going to be a pivotal one with both ratings agencies, investors and the business community holding their collective breaths to see whether the President would finally implement meaningful structural reforms necessary to kick-start a stagnant economy.

To do so would mean he can no longer continue appeasing all stakeholders including trade unions, political factions, business, taxpayers and the ANC’s traditional voter constituents. At some point, hard decisions need to be made, and trying to be all things to all people will perpetuate the state of indecision we are seeing, and South Africa simply does not have any more runway.

South Africa is currently plagued by a crippling debt problem: debt to GDP is spiralling with national debt in the next three years expected to grow from R3.2 trillion to R4.5 trillion. Weak economic growth is impacting tax revenues and the likely reality is that government debt to GDP will exceed the predictions made at both the previous budget and the last medium term budget presentation.

According to the South African Revenue Service (SARS), the majority of all individual income tax (97%) comes from just three million people out of an estimated population of 58.7 million. Not surprisingly there is a significant revenue shortfall for the new fiscal year. Exacerbating the situation is the fact that population growth is outpacing economic growth, and unemployment is at an all-time high.

The president has long been big on flowery rhetoric and vague statements. Last year’s SONA was widely panned for lacking precision and detail, instead focusing on bullet trains and smart cities despite the dire straits of the country’s public finances, or lack of a sustainable plan for debt-laden state-owned enterprises and dysfunctional municipalities.

What was required this year was a coherent sense of economic direction for the country. Ideally, it needed to focus on a smaller number of key issues and then provide a rational and intelligent plan of action. It needed to provide concrete feedback on promises made in previous SONA and budget speeches.

Minister of Finance, Tito Mboweni, in his 2019 budget speech, indicated that government would be reducing expenditure by R150 billion over the next three years. [The president failed to indicate whether it had achieved its goal of reducing spend by R50 billion in the first year.]

The president is well aware that the country’s economy is at a precipice and of the vulnerable state of public finances. Now is the time to show a firm hand with decisive policies and a practical plan of action. [However, he failed to clearly articulate how government would curb state owned companies from their dependency on bailouts or how public debt would be reduced.]

While the economic impact of load shedding in December 2019 and in the first two months of 2020 is still to be fully assessed, there is little doubt that it will have had a dire bearing on growth forecasts. Furthermore, it is likely to scare off new projects as government has failed to act critically to remove legislative red tape throttling private power production.

There are significant concerns around proposals to use Public Investment Corporation Funds to bail Eskom out of its debt spiral on the proviso that the renewable energy sector is state controlled. Firstly, using defined benefit funds to bail Eskom out is de facto a taxpayer guaranteed structure. Secondly, state ownership and monopoly has been disastrous as far as Eskom is concerned. In fact, not one state owned company has proved to be successful under the control of the current government, so to suggest that the a state owned model for the renewable sector will not be plagued by mismanagement, corruption, and ultimate failure is not backed by any historical evidence for the renewable energy sector to play a meaningful role in South Africa’s economy, to provide a good return on investment to shareholders (and thereby attract capital) and contribute meaningfully to the country’s energy generation, requires private sector involvement.

Government’s recent turnaround on its stance on both private sector energy producers and renewable energy feeing into the grid as well as permission for mines and other large businesses to produce their own energy is encouraging. Key, however, will be how quickly this is legislated. Until that time, it’s empty talk.

As German chancellor, Angela Merkel made clear during her recent visit to South Africa, German businesses are interested in investing here but only if they see better conditions in place, including less bureaucracy and more policy and legal certainty. International investors need policy certainty particularly around issues such as expropriation without compensation. In order to achieve the president’s goal of attracting foreign direct investment of R1.2 trillion over the next five years, government urgently needs to implement economic reforms at a faster pace and reassure investors that the rule of law remains in place.

One of the areas apparently discussed between President Ramaphosa and the German chancellor included the renewable energy sector. The business case for renewables is becoming increasingly more attractive as prices fall. Long-term sustainable growth and development in South Africa requires a movement away from the country’s current dependency on coal, towards an environmentally friendly renewable energy system. Experts have long pointed out that excluding renewables from the energy mix makes little economic sense given that their inclusion is estimated to improve GDP by 6%

The 2019 edition of the Integrated Resources Plan (IRP) was approved by cabinet in late 2019. Industry stakeholders, however, are concerned with the gaps in the plan including the absence of a clear roadmap for the procurement of electricity capacity and how the distributed-generation opportunity will be unlocked.

Ratings agency Moody’s will later this month announce whether government is doing enough to stabilise government debt and has sufficiently addressed the risks posed by SOE’s. Both ratings agencies and investors will be taking careful note of the contents of this SONA, particularly given the slow pace at which government has to date implemented structural reforms.

While credible appointments have been made at SARS, the boards of some SOEs and the NPA, little progress has been made in holding those accountable for state capture to book despite the president’s previous assurances to the contrary.

The president can no longer postpone making tough choices. Government needs to stop talking and start doing. 

Andrew unpacks Finance Minister Tito Mboweni’s 2020 National Budget speech. See his full article here. 

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