By Bianca Botes
With South African President Cyril Ramaphosa’s State of the Nation Address (Sona) leaving the financial markets with more questions than answers, and many of the country’s structural risks remaining unsolved, the markets should brace for continued volatility in the lead-up to the National Budget Speech on February 21, 2024, and continue to hedge against risk.
The president spoke about key issues facing the country, but fell short on explaining how these issues would be addressed. The recurring sentiment of promises around delivery without a clear implementation plan has resulted in markets becoming disinterested in Sona. The rand barely moved in response to Sona.
Sona to Sona
There has been no major shifts in economic policy, comparing Sona 2023 to Sona 2024.
High economic uncertainty remains, and was in fact exacerbated by greater geopolitical fragmentation, as South Africa continued to deviate further away from its traditional Western trade partners towards allies such as Russia, China and Iran as members of BRICS.
As we’ve seen from last year, risk premiums are being priced into the rand, and are likely to continue to be priced into the rand as these events unfold.
On implementation, the Sona only scores three out of 10 – not just in terms of the past year, but also in terms of the past 30 years. The government appears unable to solve the ongoing energy crisis, as it had promised it would in 2023 when the president announced the appointment of the new Minister of Energy.
We were told load shedding would be sorted out quite quickly, but the opposite happened. In 2023 we saw the worst load shedding on record and today we are still hovering between levels three and six. There hasn’t been much communication or resolve coming from Eskom. What we have seen, however, is a lot of private sector capital flowing into the renewable energy sector to help solve the crisis, but that’s not really a win from the state-owned enterprises perspective.
While it is encouraging to see Treasury “working hard” with the South African Reserve Bank and regulators, such as the Financial Sector Conduct Authority and the Financial Intelligence Centre, to put measures in place to get the country off the international Financial Action Task Force (FATF) greylist, Ramaphosa failed to update the country on where it currently sits in terms of the FATF’s metrics.
It is anticipated that South Africa will come off the greylist in 2025. It will be very important to continue seeing more high-profile prosecutions of people who circumvent the (new, stricter) rules around money laundering. It will also be important to see where the government sources its funding.
The recent accusation by Israel that South Africa had taken funding from Iran casts a long shadow over our greylisting, especially if those funds come from terrorist financing, and is a cause for concern.
The Budget Speech will be a tough one for Finance Minister Enoch Godongwana, but we are in an election year, so we are expecting to see more populist policies. Proposals such as the National Health Insurance (NHI) and the Covid-19 Social Relief of Distress grants being made permanent, will be popular with voters, and the government has spoken about a ‘phased-in approach’, but the business sector remains sceptical as to how the government will finance it without collapsing the tax base.
It will put significant strain on both our healthcare system and our fiscal position. It will be important to see in the Budget and exactly how they plan to finance it.
Social grants already made up 11% of government spending and the country could hardly afford increasing this number.
The big question is: do we have the financing to pull off these populist policies, and what will we need to sacrifice to implement these policies? We are hoping that the Finance Minister will make further pronouncements on key Sona themes such as job creation, public-private partnerships, the fight against corruption and state capture, and the recovery of stolen state assets.
The Sona positives
Ramaphosa mentioned closer ties between the government and the private sector. He also announced that the Investigating Directorate, a specialised and multidisciplinary unit within the National Prosecuting Authority, will investigate corruption and other serious crimes, and its 200 prosecutions and R8 billion in recovered assets to date.
While the announcement of South Africa becoming a producer of electric vehicles was positive for job creation, there is the irony of South Africa still not being able to get some of the basics right.
We have an energy crisis and 80% of children under 10 can’t read for meaning, so there are quite a few basics we need to get right in this country before we talk about electric vehicles and smart cities.
Rand muted reaction Sona
The slightly weaker rand we saw yesterday was actually in response to the jobs figures that came out of the US, showing that the labour market in the US remains significantly resilient and robust. The US Federal Reserve said rates would remain higher for longer.
Overnight we saw the dollar and US Treasury yields climb once again. As long as we have a high interest rate environment in the US, we will face a strong dollar, that will keep the rand subdued.
While interest rate cuts in the US were anticipated for around May, the market had already priced the eventuality of a decrease in interest rates in, to some extent, so the rand was unlikely to benefit as much as previously anticipated.
Bianca Botes is a leading foreign exchange expert and director at Citadel Global.