POLITICAL ECONOMIC HIGHLIGHTS FROM THE MONTH OF FEBRUARY 2020 - PUBLISHED ON 05 MARCH 2020
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POLITICAL
&
ECONOMIC
HIGHLIGHTS FROM THE
MONTH OF FEBRUARY 2020
PUBLISHED ON 05 MARCH 2020
FRONTLINE AFRICA
ADVISORY Page 02
CONTENTS
1. Introduction ................................................................................................................................ 3
2. State of the Nation Address ........................................................................................................ 4
2.1. A Way Forward for Eskom? .......................................................................................................... 4
2.2. State-Owned Enterprises and Corruption ................................................................................... 5
2.3. Preparing the Youth ..................................................................................................................... 5 - 6
3. Budget Speech ............................................................................................................................. 6
3.1. Tax Adjustments .......................................................................................................................... 6
3.2. Establishment of State Bank and Sovereign Wealth Fund........................................................... 7
3.3. Public Sector Wage Bill ............................................................................................................... 7
3.4. State-Owned Enterprises ............................................................................................................ 8
4. Eskom ......................................................................................................................................... 8
4.1. De Ruyter Appears Before Parliament ......................................................................................... 8
4.2. Nersa Court Battle ....................................................................................................................... 9
5. FW de Klerk and South Africa’s Reconciliation Project............................................................. 9
6. Risks ............................................................................................................................................ 10
6.1. Moody’s Rating Downgrade .......................................................................................................... 10
6.2. Economic Contraction ................................................................................................................. 10
6.3. Unstable State-Owned Enterprises ............................................................................................. 10
FRONTLINE AFRICA ADVISORY Page 03 1. INTRODUCTION The month of February saw much debate about what P r e si d e n t Cy r i l R a m a p h o s a ’ s S t a t e o f t h e N a t i o n A d d r e s s ( S O N A ) a n d F i n a n ce M i n i ste r T i to M b o w e n i ’ s B u d g e t S p e e c h w o u ld , a n d d i d u lt i m a t e ly , m e a n fo r th e co u n tr y . T h i s r e p o r t w i l l h i g h l i g h t s o m e o f t h e k e y i s s u e s e m a n a ti n g fr o m th e se a d d r e s s e s a n d p r o v i d e s a n a l y s e s o f h o w t h e y a r e li k e ly t o i m p a ct th e co u n tr y ’ s e c o n o m y a n d b o d y p o l i t i c . T h e r e p o r t a ls o s k e t c h e s s o m e r i sk s th a t h a ve th e p o t e n t i a l t o f r u s t r a t e a n y e f fo r t s a i m e d a t p la c i n g t h e c o u n tr y o n a r e co ve r y path.
FRONTLINE AFRICA
ADVISORY Page 04
2. 2020 STATE OF THE NATION
ADDRESS
Ramaphosa delivered his highly anticipated fourth State of
the Nation Address (SONA) on the 13th of February 2020.
This year’s address, along with the Budget Speech, has
been described as one of the most difficult delivered to
date and was hoped to inspire confidence, to both local and
international audiences, regarding the trajectory of the
country. This is especially crucial as South Africa battles a
weakened economy, high unemployment rate, poorly
managed state institutions and a looming sovereign credit
rating downgrade by Moody’s Investor Services.
More than anything, the SONA was expected to provide a
bold programme of action for the government amid the
need to place the country on a recovery path. Although the
address provided some positive points, it unfortunately
lacked the necessary boldness. For the most part,
Ramaphosa chose to play it safe and opted to satisfy
opposing internal party interests as much as he possibly
could. This has been the trend he has generally followed
throughout his Presidency.
2.1. A Way Forward for Eskom?
In the SONA, Ramaphosa rightly emphasised the economic burden of the recent bout of load shedding. The
President punted Independent Power Producers (IPPs) as the solution to the country’s loadshedding
problem, which is expected to persist for the next 18 months to allow Eskom to conduct overdue
maintenance on its power plants. It was also announced that a Section 34 Ministerial Determination will be
issued shortly to give effect to the Integrated Resource Plan 2019 to fast track the development of additional
grid capacity from renewable energy, natural gas, hydro power, battery storage and coal. All the plans
announced by the President will not materialise overnight; therefore South Africans citizens and businesses
should familiarise themselves with the loadshedding schedule and adjust their production times.
Speaking at the recently held African Mining Indaba, Mineral Resources and Energy Minister Gwede
Mantashe hinted that government would enter into talks with investors to begin a generating business
outside of Eskom, which could potentially use gas. This proposal, according to Mantashe, has only been
accepted in principle by government and now requires a regulatory framework. Ramaphosa affirmed this in
the SONA, outlining several measures to be taken in the current year to increase generation capacity outside
of Eskom, albeit not through a company structure in the current term.
FRONTLINE AFRICA
Page 05
ADVISORY
The President, Ministers Pravin Gordhan and Tito Mboweni have not wasted any time in latching on to the
suggestion by the Congress of South African Trade Unions (COSATU) that public and private pension funds be
used to ease Eskom’s debt burden. This can be viewed as an admission by government that they have run out
of ideas on tackling Eskom’s debt burden. On a generous interpretation, this can be seen as as an attempt by
Ramaphosa to institute a social compact on electricity, which will see social partners – trade unions,
business, community-based organisations and government – working together to mobilise funding aimed at
addressing Eskom’s financial crisis. The idea of using pension funds to rescue Eskom has been heavily
criticised by the Democratic Alliance, which stated that “It is unconscionable that President Ramaphosa
would pander to the ideas of trade unions to flush pension funds down an endless hole of debt”.
2.2 State-Owned Enterprises and Corruption
There has been a general agreement that the country’s
economic woes worsened in the past decade. The Zondo
Commission of Inquiry into State Capture has invested a great
deal of its work in uncovering the extent of corruption and
mismanagement within top State Owned Enterprises (SOEs).
When he took the country’s reigns in 2018, Ramaphosa
committed to the task of ‘cleaning house’ and ensuring that
persons found guilty of corruption are held to account. During
this year’s SONA, Ramaphosa once again emphasised the
impact of state capture on the functioning of SOEs, while
alsostating that his government is hard at work to ensure that
SOEs serve their developmental objectives.
Although progress has been made within the area of stabilising
SOEs, the impact thereof has not been deep enough to
stabilise and turn them around. The President’s continued
decrying of the impact of state capture on the functioning of
SOEs under the leadership of Former President Jacob Zuma, is
concerning for a few reasons. Firstly, more than anything, it
seems to be an attempt at absolving Ramaphosa of any
responsibility for the monumental failures by government
while he was the country’s Deputy President. Secondly, it
offers the current government an excuse to fall back on when
pressing reforms are simply not forthcoming. Decisive
leadership requires government to focus its efforts on a
forward-looking vision, as opposed to constantly dwelling on
the past.
2.3. Preparing the Youth
Given the escalating rate of youth unemployment, currently sitting at 29.1% Ramaphosa’s address was
hoped to provide a firm programme of action aimed at igniting job creation. The current youth
unemployment crisis means that over half of young people are without jobs, with the job market failing to
absorb trained and skilled youths. The unemployment crisis, more than anything, is very much a
manifestation of the systemic crisis in which the country’s economy currently finds itself.. While the
quality of local education is a separate challenge altogether, the central challenge around youth
unemployment is the inability of the system to absorb trained persons.
FRONTLINE AFRICA
ADVISORY Page 06
In response to this challenge, Ramaphosa announced the launching of an online platform that will allow
young people access support and information aimed at preparing them for the world of work and
increasing their employability. This will be accompanied by other measures, as outlined in the
Presidential Youth Employment Intervention, which is aimed at preparing the youth for the world of
work, offering practical experience for the workplace and creating entrepreneurial opportunities .
These interventions are important and have their unique place in tackling the youth unemployment
challenge. Where opportunities are available in abundance, it is important that the workforce possesses
the necessary skills and training to match the needs of the labour market.
What is concerning, however, is that these interventions do not adequately address the lack of work
opportunities. A proactive strategy is one that would see the government focused on working with all
social partners in creating job opportunities for the youth – in the spirit of a “social compact” on youth
employment.
3. 2020 BUDGET SPEECH
Finance Minister Tito Mboweni was faced with the difficult task of delivering this year’s allocations
from the public purse. The 2020 Budget Speech has been described as one of the most challenging,
given the current state of the economy. Although not providing any ground-breaking solutions or
alternatives, the budget can be praised as an attempt to balance multiple needs and concerns across the
board. This effort has also been praised by the leaders of opposition parties, who have commended
Mboweni for ‘doing the best he could’ under the given circumstances. The country’s economic position,
however, remains rather bleak. While the sub-Saharan African region is forecast to grow at an average
of 3.9% (African Development Bank, 2020), South Africa’s economy will experience growth of 0.9% with
inflation averaging 4.5% in 2020. This forecast has, however, been thrown into disarray with Statistics
South Africa (StatsSA) on 3 March releasing results of the 4th Quarter of 2019 which showed the
country’s economy, in fact, shrank by 1.4 in the 4th quarter, with real GDP having increased by 0.2
percent in 2019.
3.1. Tax Adjustments
To the surprise of many, Treasury proposed no major tax increases for the current year. This will
support economic growth and relieve overburdened and overtaxed South Africans. It is indeed true that,
in past years, South Africans have been bearing the brunt of government inefficiencies through
increased taxes. This has often, and understandably so, led to growing frustrations amongst the
electorate. Mboweni’s taxation plans are accompanied by personal income tax relief. Cuts will see
taxpayer relief to the tune of R2 billion. In addition to this, government has aimed to ease the tax
burden on businesses and the corporate sector. This will likely ease business’ concerns and encourage
increased activity, which has been dwindling over the years and leading to slow growth. Both tax
proposals are strategic in nature, to avoid frightening taxpayers at the risk of losing their contribution
to the economy.
FRONTLINE AFRICA
ADVISORY Page 07
As expected, the budget included increases to sin taxes, inclusive of alcohol and tobacco products. This
year’s budget also included the introduction of a tax on Tobacco Heated Products (THPs), and an
announcement for an introduction of a tax on e-cigarettes to be implemented from 2021. Thus far,
increasing taxes as a means to curb consumption has not yielded the desired results, as South Africa
remains among the top alcohol consuming countries in the world. Above inflation tax adjustments on
tobacco trade have led to downtrading and a growing incidence of illicit tobacco, which has robbed the
fiscus of much needed revenue over the years.
3.2. Establishment of State Bank and Sovereign
Wealth Fund
Treasury has also made the announcement of significant progress within the area of establishing a state
bank. This comes after parliament, last year, passed a law to allow state-owned enterprises to apply for
bank licenses. The structure of the bank, as revealed by Mboweni, will resemble a retail bank operating on
commercial principles and will be subject to the Banks Act. Deputy Finance Minister David Masondo has
previously revealed that this will involve government consolidating the existing funding institutions into
an enlarged entity. The ruling party has long endorsed the proposal of a state bank, wanting Postbank to
function as an independent state-owned bank.
Mboweni also announced that South Africa would look into establishing a Sovereign Wealth Fund, aimed
at driving savings and investment for future purposes, with a target capital amount of around R30 billion.
There has been broad agreement, among parliamentarians and society in general, regarding the need for a
sovereign wealth fund, especially given the difficult economic period the country is faced with.
In the current term, there has not been a great deal of detail given with regards to both the Bank and the
Sovereign Wealth Fund, especially in terms of the finer details around how they will function. Treasury
has, however, signalled that a policy paper aimed at addressing capital structures where the state bank is
concerned will be drafted within the coming weeks. Work will also commence to flesh out the Sovereign
Wealth Fund proposal. The introduction of these documents will provide clarity and allow for greater
scrutiny. It is hoped that both introduce mechanisms of transparency to avoid instances of corruption and
looting
3.3. Public Sector Wage Bill
Instead of increasing revenue through increasing the tax burden, government has instead aimed to cut
back on its own spending. This includes cuts on spending where the benefits enjoyed by the executive are
concerned, along with cuts to the public sector wage bill. According to the budget, government aims to
slash public service wage spending by R160 billion over the next three years. The rationale behind this
decision is that, while civil servants’ salaries have grown by 40% in real terms over the past 10 years,
there has been no real equivalent increase in productivity. Currently, government spends around a third
of its budget on the salaries of the slightly more than 1.2 million civil servants alone.
Mboweni’s public sector wage proposal will undoubtedly be his most polarising. Already, the Minister has
received strong opposition and resistance from labour unions, with COSATU describing his
pronouncements as “an ambush and a declaration of war” and the Public Servants Association (PSA) calling
it a “continued attack on public servants’ salaries". While government aims to still negotiate the public
sector wage bill with unions and public servants, it is quite clear that workers are displeased with the
proposals and will aim to work against the government’s proposals. Currently, the chances of government
ensuring the buy-in of labour unions appears seems highly unlikely. On the contrary, the threat of public
sector strikes remains a high possibility, if this otherwise sensitive issue is not handled properly.FRONTLINE AFRICA
ADVISORY Page 08
3.4. State-Owned Enterprises
The Budget highlighted the need to modernise network industries along with the restructuring of State
Owned Enterprises (SOEs) as government’s main priority. Over the next three years, Treasury will transfer
R112 billion to Eskom alone, and R56 billion in 2020/21. This is hoped to assist in enabling it to meet its
short-term financial obligations. Embattled airline, South African Airways (SAA) will also receive
government assistance, to the value of R16.4 billion, over the same period, and R10.3 billion in 2020/21.
Over the next three years, allocations have also been set aside for other SOEs, including Denel (R600
million), South African Express (R200 million) and the South African Broadcasting Corporation
(R1.1 billion).
Over the past decade, government has allocated billions upon billions to SOE’s in an attempt to stabilise
their balance sheets. This exercise has not made a meaningful impact in this regard and has, rather,
created a growing burden to the fiscus. Despite Mboweni’s announcement in the October Medium-Term
Budget Policy Statement (MTBPS) that Eskom and SAA would not receive government assistance in the
absence of progress on reforms, the current budget reflects the resolutions of the ANC Lekgotla earlier
this year, for government to ensure their survival.. There is also no guarantee that government will not
approve additional assistance to these entities during the course of the year. This has often been the case
in the past. Year after year, it becomes increasingly clear that without firm reforms within the
management and operations of SOEs, entities will continue being a burden to the fiscus.
4. Eskom
4.1. De Ruyter Appears Before Parliament
New Eskom Chief Executive Officer (CEO) Andre de Ruyter, along with the Eskom board, made his
appearance before Parliament on the 18th of February, at a briefing with the Standing Committee on
Public Accounts (SCOPA). The objective of the appearance was to provide the Committee with an update
on the recommendations made following an oversight visit to Medupi and Kusile Power Stations last year.
Following its visit, the Committee took a decision to keep a close eye on the power utility. This is after it
found that both power stations were poorly designed from the beginning, and that fixing them is a
mammoth task. This made it clear that poor management lied at the very core of the stations’ poor
performance over the years along with the prevalence of load shedding.
In a case of the more things change, the more they stay the same, the briefing was undermined by a
number of issues including the unaccounted absence of the board’s interim chairperson and lack of
concrete plans and details regarding Eskom’s recovery. De Ruyter called for patience from the
Committee and South Africans at large, stating that Eskom’s challenges cannot and will not be fixed
overnight. While it is unrealistic to expect the CEO to have made sweeping changes within the time he
has been in the top position, it also true that where Eskom is concerned, time is a luxury it cannot afford
at the moment. Lack of concrete plans regarding Eskom’s future are also concerning and does not paint a
positive picture for its future.FRONTLINE AFRICA
ADVISORY Page 09
4.2. NERSA Court Battle
The struggling utility is involved in a court tussle with
the National Energy Regulator of South Africa (NERSA)
where it is asking the court to overturn a decision made
by the regulator on regarding tariffs increases. Last
year, the regulator, last year, allowed Eskom to raise
prices by 8.1 percent in 2020 and 5.2 percent in 2021.
To increase its revenue the utility desires an increase
of 16.6 percent in 2020 and 16.7 percent in 2021 –
estimated to generate an additional R27 billion. Eskom’s
fractured relationship with the regulator over the years
has repeatedly seen it being allowed lower increases
than requested.
While lamenting the need to generate more revenue, a
strong argument against Eskom’s request has been that
it is one of few companies asking its customers to use
less of its product to curb demand. More than anything,
the utility’s request is an effort to shift
responsibilityfor its own governance failures to
consumers. In the interim, Eskom has lost its bid to
have NERSA’s decision reversed through the courts.
Eskom’s proposal has also gone through a round of
public hearings facilitated by the regulator. With the
bulk of comments lamenting high electricity prices and
Eskom failing to satisfy the committee’s requests, the
utility is unlikely to secure its desired outcome.
5. FW DE KLERK AND SOUTH
AFRICA’ S RECONCILIATION
PROJECT
Former President FW de Klerk’s recent comments that apartheid was not a crime against humanity have
once again exposed South Africa’s complex relationship with its apartheid history. With the country
nearing 26th year of democracy, it is clear that South Africa is still very much divided along racial lines,
which has manifested itself in high levels of poverty and unemployment experienced in the main by the
black majority. What is also apparent is that the so-called reconciliation project has thus far not yielded
its desired outcomes.
The unfortunate reality is that de Klerk is only one of many who fail to fully comprehend and come to
terms with the gross atrocity that apartheid was. For South Africans who benefitted, and continue to
benefit from, the system, its dismantling represented nothing more than a change in political power.
‘Change’ came with no shock to the system and without a rigorous plan of redress and justice.FRONTLINE AFRICA
ADVISORY Page 10
It comes as no surprise, then, that privileged South Africans feel justified in their downplaying of black
pain and oppression. Helen Zille’s controversial colonialism statements fall squarely within this line of
thinking. The privilege that feeds apartheid denialism makes the beneficiaries of the system blind to the
ways in which it impacted and continues to affect the lives of thousands of South Africans daily.
6. Risks
6.1.Moody’s Rating Downgrade
Moody’s Investor Service is due to give its rating of the economy at the end of the month of March. The
possibility of a ratings downgrade remains high. With both the SONA and Budget Speech having passed, the
agency issued its responses to the statement, highlighting several concerns. Regarding the SONA, Moody’s
pointed to the financial strain Eskom continues to exert on the fiscus. The President’s proposals on Eskom
have been viewed as broad, offering very few concrete measures to overcome its structural challenges. The
agency’s main worry where Minister Mboweni’s address is concerned pertains to government’s ability to
negotiate its public sector wage bill proposals with labour unions. From both ends, it is clear that the
agency’s expectations have not been adequately addressed.
6.2. Economic Contraction
The recent news, by StatsSA of the country entering its third recession since 1994, only adds to the list of
woes faced by Ramaphosa’s government. It is quite clear that the country is struggling to lift itself from its
economic slump. Should the country’s economic challenges persist, the dreaded option of a bailout from the
International Monetary Fund (IMF) is likely to come into play. This, of course, is an unfavourable option.
When the IMF becomes involved, governments are required to install specified structural adjustments as a
trade-off for financial assistance.
6.3. Unstable State-Owned Enterprises
The challenge of unstable, embattled SOEs is central to the majority of the challenges currently faced by the
country, specifically pertaining to the growth and stability of the economy. Unless SOEs install reform
measures, as a matter of urgency, the country will continue to be plagued by weak economic growth.
6.4. Continued fractures in the ruling party
On Saturday 22nd February 2020 former President Jacob Zuma landed at the OR Tambo International Airport,
reportedly from medical treatment abroad, to a hero’s welcome. What made this event important was the
presence by, and vocal support from, some prominent leaders of the ANC aligned to the so called ‘RET
faction’, including former North West Premier Supra Mahumapelo, Ekurhuleni mayor Mzwandile Masina, Joe
Maswanganyi and Free State Provincial Chairperson, Sam Mashinini. The deepening of cracks within the ANC
as it prepares for the all-important National General Council (NGC), which has been postponed to 30th July-
3rd August 2020, remains a risk to the country’s body politic, to the extent that differences amongst the
ruling party’s leadership tend to send jitters to society and markets.You can also read
