By Mamello Matikinca, Chief Economist, FNB.
As expected, last night in the State of the Nation Address (SONA) President Cyril Ramaphosa highlighted the notable strides that have been made over the past year, which include a fairly successful investment summit that attracted around R300 billion in investment commitments. The president noted that projects to the value of R187 billion are being implemented, and projects worth another R26 billion are in the pre-implementation phase.
In an effort to address bottlenecks that make it difficult to do business in South Africa, the presidency has established a committee that will investigate and provide recommendations on how to improve the ease of doing business. To address the high level of economic concentration and increase competition the president announced that he will be signing the Competition Amendment Bill into law. Initiatives to improve regional trade, demand for locally produced goods and tourism were also announced. Further, the eVisa regime will be introduced this year.
Creating jobs was central to the statement and, as such, greater attention will be placed on policies and programmes in key parts of the economy that are labour intensive. These include agriculture, tourism and the ocean economy.
On land reform, the president highlighted that this is still a priority and that the process would be guided by the work of the Constitutional Review Committee tasked with the review of Section 25 of the Constitution. Furthermore, Deputy President David Mabuza will lead the Inter-Ministerial Committee on Land Reform to fast-track land reform.
The president acknowledged that Eskom is in a crisis, as it remains highly indebted and currently operates at a loss, and noted that government would support the utility’s balance sheet. While further detail of what this entails will be revealed in the annual budget later in February, we believe that the government will most likely offer some form of a bailout to Eskom. It was also announced that the power utility would be unbundled into generation, transmission and distribution.
While it is not clear what form of support will be offered to the utility, the president hinted that any assistance would have to be budget-neutral. Following Eskom’s request for the government to take on R100 billion of its total borrowing of R420 billion, Moody’s noted that “the transfer will increase South Africa’s debt/GDP ratio by around two percentage points from the 55.8% envisioned for fiscal year 2019”. Moody’s further noted: “if the debt transfer grants further measures like efficiency savings and/ or tariff increases requested by the company in October that reduce this contingent liability risk, the overall credit impact of the debt transfer could be neutral”. While the president stated that processes of resolving challenges that the utility faces would be undertaken cautiously and that all affected stakeholders would be consulted, we remain concerned about pushback from labour should they not agree with the general terms of the agreement.
In all, the SONA touched on pressing issues that need to be addressed with urgency in order for the economy to reach its full growth potential. We keenly await further detail in the National Treasury’s Budget Review in two weeks.