In the face of a sluggish economy expected to grow by just over 1% this year and growing unemployment, President Cyril Ramaphosa hasn’t missed an opportunity to state that his priorities for the next five years centre on stimulating economic growth.
With the elections behind us, Ramaphosa is expected to get to work implementing the reforms that will turn the country’s economy around. The economy is expected to have contracted sharply in the first quarter of the year.
Ramaphosa has already received the backing of the investment community, with New York-based bank Goldman Sachs promptly endorsing his victory. At a panel discussion on foreign investment this week, the bank’s sub-Saharan Africa head Colin Coleman said the country was “fortunate” to have someone of Ramaphosa’s stature and who has a clear vision of where he wants the country to go.
Coleman says Ramaphosa’s victory lays the foundation for an increased focus on economic growth but that there will be “no easy wins”.
The population is growing at 1.5% while the economy is expected to grow by between 1.2% and 1.5% this year. “Which is very poor,” says Coleman.
He believes that while the country should be able to get growth up to 2.5% by “just doing the basics”, it will be more difficult to get back to the average 4% growth rate seen during former president Thabo Mbeki’s administration.
Ramaphosa, who is set to announce his cabinet in the next few weeks, will be monitored closely by investors and multinationals who expect to see a new administration that is clean, capable and not “bent towards patronage,” as Coleman puts it.
Eskom needs to be immunised
The biggest threat to the economy is Eskom, and Ramaphosa will need help from every sphere in the country.
“He has to immunise Eskom and ensure that it does not default, creating a cross-default that leads to a financial and economic crisis in South Africa which will lead to a recession and high cost of living as interest rates rise,” says economist Lumkile Mondi.
Eskom has over R400 billion in debt and is not expected to generate enough money to pay all of its maturing financial obligations over the next five years.
Rating agency Moody’s has warned that if government does not live up to the fiscal consolidation and policy reform decisions made in 2018, South Africa’s debt could rise to over 70% of GDP by 2023.
The rating agency now includes Eskom’s government-guaranteed debt in its assessment of the nation’s fiscal situation after the utility proved that it was unable to service its debt, forcing the state to release emergency funds to prevent it from defaulting on its liabilities.
Moody’s analyst Lucie Villa says that what is striking about South Africa when compared to its emerging market peers is that its economic growth is not only low, but is slowing.
Speaking to Moneyweb, Villa added that while the country’s debt-to-GDP levels are currently in line with those of its Baa3-rated peers, the main difference lies in the trajectory.
She says that without policy transformation, South Africa’s prospects will edge closer to those of Morocco, which is rated at Ba1.
Moody’s is the only major rating agency that has not junked South Africa’s foreign debt, placing the country on a stable outlook. A Ba1 rating is the first level of junk status on Moody’s non-investment scale.
“This gives you an idea of [the fact] that if there is no effective response on the part of the authorities, [that is] where we would go,” says Villa.
Moody’s was expected to release a credit rating report on South Africa’s bonds in March but postponed the announcement to November.
Mondi says Ramaphosa will have to ensure that there is a buy-in from all sectors of society regarding how Eskom is going to be fixed. “That will include the shedding of labour and a social plan of [the] communities that [owe] Eskom billions of rands.”
This will make it easier for Ramaphosa to focus on the growth plan, says Mondi.
However, the state’s plan to restructure Eskom into three separate entities met with opposition from unions who said it would result in job losses – and Ramaphosa reassured labour that there would be no job losses as it restructures Eskom.
“When we are restructuring there should be no holy cows,” says Mondi.
“All of us are in this together and all of us are going to have to take the pain.”
He says the country will be worse off if it fails in this.
“Really, the stakes are very high,” he adds.
The growth strategy for South Africa will be informed by Ramaphosa’s cabinet. For Mondi the key characteristics of Ramaphosa’s cabinet are that it be professional and capable. This includes selecting two people from outside the ANC alliance.
“Those two people, hopefully, they will be the ones that will strengthen the economic cluster and bring in capability and expertise to drive key investments and the growth agenda,” said Mondi.
The test for South Africa in the so-called ‘new dawn’ will be the composition of that cabinet. “We need people that are going to put South Africa first,” says Mondi.