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A New Dawn for the NDP?

A New Dawn for the NPA?

Commentary: 4 February 2019

The rand emerged as the clear winner last week, with the US Fed reiterating at its policy meeting that it would be patient in waiting to hike interest rates. Such dovish talk always bodes well for emerging markets and reflective of this, the rand has strengthened by 7.4% against the dollar in the past month, outperforming all other emerging market currencies. (The rand was further buoyed with the news last week that the trade balance in December recorded a surplus of R17.2bn. Exports totalled R102.7bn while imports were valued at R85.6bn. The cumulative trade balance for 2018 was R11.3bn. China remains our single largest trade partner, followed by Germany and the USA). 

Nevertheless, the global environment remains tenuous. The US has imposed sanctions on Venezuela, British MP’s have voted to send Prime Minister Theresa May back to Brussels to find an alternative Brexit arrangement and fourth-quarter Eurozone data shows that Italy has fallen into recession.  

With Tito Mbweni’s maiden Budget speech fast approaching, analysts will be waiting to see if the new finance minister has the answers to several difficult choices that SA must make. The first of these is to halt the rise in the public sector wage bill. Not only has there been an increase in the number of public sector employees, but wages have been rising faster than inflation (at an annual rate of 11.2% between 2006/07 and 2017/18). Since public sector unions make up a significant portion of the ANC support base, negotiations will be difficult but necessary if SA is to avoid a fiscal cliff. Considering the poor quality of services rendered, it appears that the fiscus is throwing good money after bad. To put public sector wage spending into perspective, compare it to several other nations:

Another immediate challenge which must be tackled is Eskom and the threat it poses to the country’s overall fiscal health. In the 12 months to 30th September 2018, Eskom’s borrowings increased by R52bn to R419bn, requiring R45bn to service this debt, but only generating cash flow of R27bn. Increasing tariffs is no panacea. Higher tariffs will not only erode economic growth but will force electricity consumption downwards, the exact opposite effect to what Eskom is hoping for. The recently established task team is due to report back to President Ramaphosa this week and one of the recommendations is likely to be that Eskom be broken up into two standalone companies, generation and transmission. The generation company would own and run the Eskom power stations, while the transmission company would be responsible for operation of the national grid. (The task team has not recommended that the third component, distribution, be spun off at this stage). Opposition to this proposed plan could emerge from several parties, most notably the unions. But restoring Eskom’s financial credibility will be crucial if SA is to shrug off the chains of stagnating growth. 

And finally, SA wishes new national director of public prosecutions, Shamila Batohi, the best of luck in her new role. It will not be easy. Public trust in the NPA is eroded, there is much internal politicking and the organisation is struggling with too many vacancies and too little funding. Batohi has several high-profile matters on her plate – Steinhoff, VBS, Estina, Bosasa. Let us hope that Ramaphosa allows her to do her job without fear or favour.   

In terms of the week ahead, the key event will be the President’s State of the Nation address. We can expect more information around Ramaphosa’s investment drive and the jobs summit. Information about how the state intends to grow the economy would also be welcome. 

By Bridget Kelly, Santam   

Disclaimer:

 This research has been written by the economist at Santam Structured Insurance Limited (“the Insurer”). Whilst all care has been taken by the Insurer in the preparation of the opinions and forecasts and provision of the information contained in this report, the Insurer does not make any representations or give any warranties as to its correctness, accuracy or completeness, nor does the Insurer assume liability for any losses arising from errors or omissions in the opinions, forecasts or information irrespective of whether there has been any negligence by the Insurer, its affiliates or any officers or employees of the Insurer, and whether such losses be direct or consequential. Nothing contained in this document is to be construed as guidance, a proposal or a recommendation or advice to enter into, or refrain from entering into any transaction, or an offer to buy or sell any financial instrument.

This communication is not intended nor should it be taken to create any legal relations or contractual relationships.

Santam Structured Insurance Limited is an Authorised Financial Services Provider under South African law (FSP 1027).