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Ok. Got itConnecting the dots helps to identify past trends and predict future outcomes in the political and economic landscape.
This political research note was prepared by JP Landman in his personal capacity. Landman is an independent political and economic analyst, and the opinions expressed in this article are his own and do not reflect the views of Nedbank Group. |
By JP Landman
29 April 2022
Steve Jobs famously said that one can only connect the dots backwards. We have been connecting the dots on government’s economic policy since 2018. The dots tell us what has been done, not what will be done nor what has been promised. They help us to distinguish between daily headlines and longer-term trends. (I apologise in advance that this read is longer than usual – there are just too many dots!)
Supportive macroeconomic framework
A stable macroeconomic framework is one of the five key pillars of growth. (See, for example, the report from the International Growth Commission on which Trevor Manuel also served). This simply means sustainable fiscal policies (reasonable deficits and debt) and sound monetary policy (curbing inflation).
Monetary policy
An independent reserve bank is crucial for stable, non-political inflation targeting and control. The South African Reserve Bank’s (SARB’s) independence came under severe attack. At the African National Congress’s (ANC’s) Nasrec conference in December 2017, a resolution was adopted to nationalise SARB. Eighteen months later, in June 2019, then-Secretary General Ace Magashule pushed the envelope and called for ‘quantity (sic) easing’ and a change in the mandate of SARB. Ex-president Jacob Zuma joined the fray and tweeted that a change in mandate was ANC policy and if not implemented, government could be recalled. The Public Protector published a report on changing the mandate of SARB. Julius Malema and the Economic Freedom Fighters (EFF) tried to make political capital about nationalising the Bank. Connect all these dots and they suggest a total onslaught on SARB.
However, 48 hours after Magashule’s June 2019 statement, the ANC Top 6 issued a statement affirming the mandate of the Bank, confirming the role of the Minister of Finance in setting inflation targets and stating clearly that nothing would change. Magashule, part of the Top 6, had to swallow his words.
The statement also dealt with the ownership issue, saying: 'It is our desire for the SARB to be publicly owned. However, we recognise that it will come at a cost, which given our current economic and fiscal situation, is simply not prudent.' The noise around SARB died down ─ even the EFF went quiet ─ and SARB's independence and stature have since only grown.
Connect all these dots and June 2019 was the month that the tide turned on SARB.
Fiscal policy
The first dot on the fiscal policy page was made in February 2019, before Covid-19, when the President made a commitment in the State of the Nation Address (SONA) '… not to spend our way out of our economic troubles'. That was three months before the general election and a spending splurge was predicted by the chattering classes. In the event, spending in that year was only 0,3% above the ceiling set by the National Treasury.
The commitment to fiscal discipline was severely tested over the following three years with the Covid-19 pandemic, load-shedding, massive Eskom and other state-owned enterprise (SOE) bailouts and the destabilising effect of the July 2021 unrest.
Given these pressures, what do the dots suggest on that fiscal commitment?
In the 2020/2021 financial year, government broke the three-year wage agreement on civil servants’ increases. Consider the politics: Cosatu unions had helped Cyril Ramaphosa become President. It’s no small matter to break a negotiated agreement with your supporters. On top of that, in 2021 it was followed by civil service increases considerably below inflation. We will see what happens this year, but for two years increases were held tight.
Another dot is that extra spending due to Covid-19 and emergency relief was substantially (not fully, since debt was taken on as well) financed by cutting other expenditure – the (in)famous re-prioritisation of expenditure. There is not a department or agency that has not seen its budget cut. The economy shrank by 6,4% in 2020 when Covid-19 first hit. Government spending to off-set the impact of Covid-19 was about 5,5% of gross domestic product (GDP) – well within the rule of thumb that expansionary spending can be equal to the contraction. That dot confirms no splurging. (Government aimed to spend 10% of GDP, but that did not materialise as the bank guarantee scheme did not take off as planned).
In my view, these decisions were no mean achievement given the context. Of course, the favourable terms of trade from commodities helped the fiscal position. But it came after the tough decisions were taken. No wonder then that Moody’s changed its outlook this April from 'negative' to 'stable'.
All this must be seen against the very different pattern of dots of Zuma's attacks on the Treasury in 2016 and 2017. Remember 'weekend special' Des van Rooyen in 2016, the dismissal of Pravin Gordhan and Mcebisi Jonas in 2017, the overwhelming evidence of state capture…? In South Africa we now take stable macro policy for granted because we have it. But it did not happen by itself.
Structural reform
Beyond macro policy, the single most important pattern of economic policy dots concerns government’s commitment to structural reform.
The first big dot came in August 2019 when Tito Mboweni published the Treasury paper on structural reform. It was met by general howling and condemnation, even from some in business. Six months later, in February 2020, the President quietly declared in SONA that the Treasury paper 'is now cabinet policy'. By October 2020, there was a dedicated unit in the Presidency working solely on promoting structural reform. The Economic Recovery and Reconstruction Plan largely reflects the Treasury paper – and is now generally accepted government policy. All departments defer to it. Structural reform has become the key economic policy of the Ramaphosa administration.
The biggest reform is playing out in the so-called network industries: spectrum/telecommunications, transport and electricity. Digital migration and the concomitant spectrum release has been completed after 10 years of delay. (In the first eight years the delay was due to political ineptitude; in the last two years it was due to private sector resistance.) It is now done and dusted. The auction netted R14,4 billion for the Treasury. If that is not a bright dot, I do not know what is.
Dots outside government are investments by Google and a Facebook consortium in undersea cables linking South Africa to the wider world, more than doubling all current capacity. Inside the country, MTN, Vodacom and Remgro subsidiaries are all extending fibre connections beyond the usual areas into poorer communities at affordable prices. A total of R2,5 billion has been put in the budget for the South African Connect project, which aims to bring broadband access to all South Africans, prioritising rural and under-serviced areas.
Next came railways and harbours. Two years ago, the policy on railways and harbours was still one of state-run monopolies. Change started slowly, then accelerated. First, regulating functions in both railways and ports were separated from operations. Next, infrastructure was separated from operations to determine proper charges. That opened the door for private operators to enter railway and port operations. The physical separation took about 18 months. Then, in April 2021, the President announced that a new pier would be built in the Durban harbour by the private sector in a R100 billion project.
Since then, Transnet has issued requests for proposals for a new manganese terminal at Ngqura in partnership with the Coega Development Corporation, as well as one for a liquefied-natural-gas terminal in Richards Bay. In April 2022, Transnet Freight also opened bids for slots on the container corridor between Durban and City Deep in Gauteng. (There is an entirely predictable tussle on terms and conditions; see the paragraph below 'Have a heart'). Work is also being done to upgrade the railway line from Tshwane to Gqeberha to facilitate vehicle exports that currently go by road and through the congested Durban. It is a R7 billion project.
Energy reform
The biggest reform of all is taking place in electricity. Not just the biggest, but also the most important, since load- shedding is by far the largest constraint on the economy. Fixing electricity is more important than crime, education, corruption and every other ill inflicted on South African society. In the past two years, I have written seven times about the big reforms in electricity and will not repeat it. Here I want to focus on load-shedding and overcoming that.
The supply shortage causing load shedding is 4 000 MW to 6 000 MW. How much of that will be covered by current procurement? Connect the dots and note the trend:
The dots above add up to more than 11 500 MW that will be connected to the grid by 2025. It excludes the 1 200 MW from Karpowership. Compare that to the 4 000 to 6 000 MW deficit. As sure as I am writing this, more bid windows will open this year and next. I am listing only the dots that are already on the page. Of course, 1 MW of renewable power is not the same as 1 MW of base load, but still, the gap is being narrowed considerably. Load-shedding will not be a permanent feature of our future. Mistakes have been made and delays occurred, but the trend is absolutely clear.
Infrastructure
A key element of economic recovery is more infrastructure. Readers will know I have been cautious on this issue, simply because so many ducks have to be put in a row. It now looks as if I may have to shift my stance – the ducks are lining up.
The first is the budget. Infrastructure spending by government entities increased by a healthy 22% in 2021/2022, enough to overtake the numbers recorded in the two years before Covid-19. Investment spend is set to increase a further 15% over the next three years. Transport and logistics (roads, railways, and small harbours) get the biggest chunk, and water and sanitation the second biggest. (By the way, a very competent and experienced civil servant, Sean Phillips, was appointed Director-General of the Department of Water and Sanitation in December.) The third biggest chunk goes to energy to expand power-generation capacity. Noticeable big projects include Phase 2 of the Lesotho Highlands Water Project to supply Gauteng (R32 billion) and the project on renewable energy and water saving in government buildings (R55 billion). The latter will be done by the private sector with its capital on a build, operate and transfer basis.
The second is an innovation, the Infrastructure Fund, which blends public and private money to facilitate infrastructure investment. After a three-year struggle, it at last became operational in 2021. This year, the Treasury put R4,2 billion into the fund, with another R13,3 billion to follow over the next two years. Over 10 years, the Treasury will contribute R100 billion. (One wonders if some of the money from the spectrum auction will go there…?)
Seven projects adding up to R21 billion have been approved by the fund, which will contribute R2,6 billion of the money, with the balance coming from the private sector and development institutions. It shows the leveraging impact that the fund can have. The seven projects include social housing and student housing projects and two water projects (the Olifantspoort and Ebenezer Water Supply Scheme and the Mokolo-Crocodile River Water Scheme, both in Limpopo).
A third duck getting into the row is the deliberate effort to build skills. Last year, government admitted that it simply does not have the capacity to run infrastructure programmes. A dedicated unit, Infrastructure South Africa, was established to build a pipeline of projects – in the process building skills and capacity. The Treasury, through its technical advice service, is helping to build skills at both the Infrastructure Fund and at Infrastructure South Africa.
Infrastructure South Africa’s work also involves unblocking policy and regulatory obstacles to infrastructure development. An example is getting land rezoned by a municipality to build a school. Currently, it takes an inordinate amount of time. (The same problem exists in getting land rezoned for renewable-energy projects).
Connect the dots of political will, more money and building capacity, and infrastructure spending is likely to increase considerably.
Growth dividend
Treasury modelling suggests that these structural reforms should add about 1,7% to GDP growth. If we take our current growth ceiling as about 1,5%, it means that growth can go to 3,2%, which is double our population growth.
Have a heart
Allowing the private sector into the network industries and financing infrastructure is new territory for South Africa. We grew up with state monopolies in the network industries. The tradition is more than 100 years old. Converting to private sector participation requires new rules and practices. Developing them will necessarily take time. Who takes the risk? Who does the maintenance? What is a reasonable return? Over what period? These are the details that need to be thrashed out. Naturally it involves a process of negotiation and arm twisting between old monopolies and new private sector players.
On toll roads, we have developed successful partnership models. It happened through an intensive process of having all the parties in the same room, the engineers, bankers, operators, builders, lawyers and policy makers. The same will now be happening in energy, railways and harbours. It is not necessary to go hysterical when the process plays out and it seems like the parties are far apart.
The trend is clear: the genie is not going back into the bottle of state monopolies. We will learn how to have a ‘mixed economy’ in the network industries.
Employment stimulus
A separate page in the economic report book concerns short-term relief measures on unemployment.
In October 2020, the President set the goal of 800 000 public employment jobs. This must not be confused with civil service jobs. They are temporary jobs paying a stipend of R 3 500 per month. To date, 850 000 people have been employed in this programme, of which more than 500 000 have been employed in education as teachers’ assistants, cleaners and janitors in schools. More than 80% are young people and 60% are female. The number is set to rise to one million this year. There is enough money in the budget to sustain the programme for three years. Will it solve the country’s unemployment problem? No. Will it contribute to alleviating poverty and put some food on the poorest tables in South Africa? Yes.
The programme is now being expanded beyond government by using the capacity of non-governmental organisations (NGOs) and community organisations that work in areas such as urban agriculture, early-childhood development, public art and gender-based violence. It is expected that 50 000 jobs will be created that way.
Other dots include:
These dots will not resolve South Africa’s unemployment problem of nearly 12 million unemployed people. To lower unemployment substantially we need to increase the size of our economy. That is where the structural reform measures come in. But these employment measures provide young people with the work experience they need to take their first step into the labour market. They also bring much-needed relief while unemployment is rife.
So what?
Disclaimer This is a political research note and was prepared by JP Landman in his personal capacity. Landman is an independent political and economic analyst and the opinions expressed in this article are his own and do not reflect the views of the Nedbank Group. |