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SOUTH AFRICA - Hobson's choice for Ramaphosa.

Summary: South Africa is in its longest-ever downward business cycle of 66 months. With his election victory behind him, what can President Cyril Ramaphosa (below) do to reverse the trend and finally deliver what his hard-pressed population have been crying out fo

President Cyril Ramaphosa's aspirations in his State of the Nation speech in June and his budget vote speech in July on how to tackle the entrenched problems of the economy, and meet the expectations of the long-suffering South African populace, have been aspirational but little else.

If Ana LucE[degrees]a Coronel, head of the IMF's latest surveillance mission to South Africa in June, was looking for more concrete proposals from the President she would surely be disappointed.

Even Finance Minister Tito Mboweni's speech in support of the vote for his first budget, delivered originally in February, was a mere reiteration of his President's sentiments, revealing an administration full of promise on the bigger picture but bereft of substantive short-term solutions.

"Following President Ramaphosa's election," Coronel advised her Executive Board, "there is a sense of cautious optimism about economic prospects as the new government formulates its policy agenda.

"Amid challenging global economic conditions, the growth outlook will depend critically on the pace of implementation of reforms that address long-standing structural constraints."

She warns: "If reform implementation accelerates sufficiently to lift business confidence and jump-start private investment, growth would be reignited. If reforms are delayed, investment would fail to pick up, economic growth would remain weak in the medium term, and per-capita income would continue to decline. With underexploited export potential, the external position would remain weak and the current account deficit financed mainly by non-FDI inflows."

The fiscal deficit, she added, is set to worsen as weak real GDP growth constrains revenue, current expenditure remains rigid, and public enterprises require additional support. As a result, stressed the IMF, debt pressures are likely to further increase in the near term.

"Weak finances and operations of public enterprises, particularly Eskom, represent a major downside risk to growth and the fiscus.

"Action is needed to reduce the fiscal deficit, reverse the ongoing increase in public debt, and restore much- needed fiscal buffers to protect the government's development objectives and its ability to respond to shocks," she emphasised.

At the heart of the travails of the South African economy is an ideological and intellectual battle going on -- a choice between democratic socialism and market capitalism (the so-called liberal consensus).

President Ramaphosa has called for a "relentless focus on economic growth", the need to "unleash private investment" and to address the costs of doing business.

In November this year, Pretoria will host a second Investment Conference in its ambitious goal of raising R1.3trn in the next five years, the proceeds of which would finance programmes that "are viable and can create jobs".

Ramaphosa has even alluded that the state should take on an "entrepreneurial role" in a "capable and developmental function". It remains to be seen whether the state has the competence, capacity and credentials to do this effectively.

Rock and a hard place

The question which the IMF rating agencies, foreign investors and South Africans are asking is: 'How credible is the ANC government's commitment to growth and market-based solutions?'

Michael Morris of the Institute of Race Relations (IRR), an independent think-tank, contends: "We don't believe the ANC is committed either to growth or to market solutions -- both of which would undoubtedly give the bulk of South Africans a better chance than the persisting commitment to failed statist, race-based and redistributionist policies which find us lagging behind comparable emerging economies."

society with real disadvantage (mainly poor skills coupled with the absence of jobs which can be the first rung on the ladder out of poverty), 25 years after Apartheid."

It is this policy 'crisis of credibility' that President Ramaphosa and his ministers need to overcome. He may find that beguiling the Fund and foreign investors is easier than South Africans of whatever political background.

Then there are the perceived barriers to a growth and market-based strategy. According to David Ansara, Chief Operating Officer at the Centre for Risk Analysis (CRA), and his colleague Ian Cruickshanks, a major barrier is the over-regulation of the labour market, which makes it difficult for employers to fire delinquent workers and acts as a disincentive to hiring new workers.

This, they insist, results in unemployment levels that are among the worst in the world, with some 6.2m South Africans classified as unemployed on the narrow definition and 10m on the expanded definition.

"On labour policy we expect that the new Minister will be exceptionally hostile to any liberalising reforms. The National Minimum Wage Act of 2018 has been brought into force, despite Treasury warnings that it could cost more than 700,000 jobs.

"Secret strike ballot requirements, the supposed quid pro quo, are unlikely to have much practical value. Our working assumption is that no policy mechanisms will be considered to ease labour market access for unemployed people," they add.

"Out of some 30m working adults, some 500,000 taxpayers contribute more than 60% of personal income tax. A Revenue Service report showed that out of the country's 3.7m companies, 340 of the largest local corporations paid 56.8% of corporate income tax (2015 tax year). Each had reported taxable annual income of more than R200m [$14.36m]. They accounted for just 0.2% of all local companies with positive tax income."

Morris goes on to say: "Things have got worse since 2015, which reflects a picture of a stagnant economy and, to use the government's term, a shockingly 'untransformed'

More sanguine projections

Fitch Ratings is a touch more sanguine about the economic prospects of the Ramaphosa Presidency following the ANC's handsome victory in the May national elections.

"Fitch does not believe that the decline in ANC support will significantly affect the prospects for economic reforms or fiscal consolidation. But structural obstacles to reform, including the power of vested interests, persist. Implementing the turnaround plan for Eskom (the state-owned electricity company), will depend on overcoming trade union objections."

Fitch does recognise tensions exist between the government's objectives of addressing inequality, ensuring fiscal sustainability and accelerating GDP growth.

"High inequality and the rise of the EFF [Economic Freedom Fighters] party could prepare the ground for more populist economic policies, but Fitch still expects land reform to be handled in a way that has no significant negative impact on growth or fiscal metrics."

Ramaphosa's choices

So what are the priorities for Ramaphosa going forward? In his State of the Nation address, he identified seven priorities for his new administration -- economic transformation and job creation; education, skills and health; consolidating the social wage through reliable and quality basic services; spatial integration, human settlements and local government; social cohesion and safe communities; a capable, ethical and developmental state; and a better Africa and world.

The growth scenario remains weak. Fitch revised its forecast for 2019 to 1.6%, which roughly equates to the 1.5% projected by the National Treasury but is higher than the IMF's 1.2%.

This is on the back of a weak outturn in Q4 2018 and a continued fall in business confidence in Q1 2019, possibly connected to concerns over the electricity supply.

In a rare ray of hope for Ramaphosa, Fitch forecast growth to recover next year as replacement investments have to be made, rising real wages support private consumption and policy rates are kept on hold.

It projects GDP growth to increase to 2% in 2020, well short of the 6% the economy needs to grow by in order to make a real dent in the country's high rates of poverty and unemployment. In contrast, the Centre for Risk Analysis (CRA) could not be more to the point -- the South African government has simply spent more money that it has received from revenue over the last ten years. The CRA maintains that the budget deficit is forecast at a revised estimate of 4.2% in 2018/19, 4.5% in 2019/20 and 4.3% in 2020/21.

"Government expects to collect revenue of R1.58trn in 2019/20, but expenditure will increase to R1.83trn over the same period. That means government will spend R243bn more than it 'earns'.

"Gross national debt is estimated to approach 60% of GDP by 2023/24. Interest expenditure alone will reach R209bn in the coming year," the CRA maintains.

For them, reducing the national debt is an urgent priority. Given that taxpayers are already overburdened, this can only be done through reducing the size of the bloated civil service and basing public sector wages on productivity and performance.

South Africa is in its longest-ever downward business cycle of 66 months. Real structural reform is unlikely in the short term which means South Africa's economic outcomes will remain poor for the foreseeable future.

To the IMF's Ana Coronel, a focus on policy actions to remove long-standing structural constraints to growth and accelerate job creation is a must.

To her this is a 'renewed opportunity' for the ANC government to press ahead with policies to further strengthen governance, encourage competition, increase labour market flexibility, and reduce the cost of doing business. But the government has to act decisively to restore policy certainty and boost investor confidence.

President Ramaphosa's dream for the next decade is that "we will have made progress in tackling poverty, inequality and unemployment, where no person in South Africa will go hungry and our economy will grow at a much faster rate than our population."

Perhaps he should heed the advice of many of his countrymen who in a recent IRR Hope Survey suggested that the top five priorities for government should be to create more jobs, fight corruption, improve education, fight crime and build more RFP housing. n

A Revenue Service report showed that out of the country's 3.7m companies, 340 of the largest local corporations paid 56.8% of corporate income tax.

Fitch Ratings projects GDP growth to increase to 2% in 2020, well short of the 6% the economy needs to grow by in order to make a real dent in the high rates of poverty and unemployment.

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Publication:African Banker
Geographic Code:6SOUT
Date:Aug 5, 2019
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