#SONA2016 / As expected, the State of the Nation Address (SONA) from President Zuma was broadly decomposed into different parts: fiscally conservative written by the Treasury (also on parastatals), left wing policies ahead of the election, and more promises to work with business.
However, the key for us was the total lack of any new way of thinking in wider government policy to boost growth. There was only limited recognition of the current economic malaise while overplaying the success of past policy targets.
We did not see any meaningful microeconomic structural reforms to give more hope on growth to investors or, more important, to ratings agencies.
As such, our low expectations were broadly met, but local expectations, which were looking to give the benefit of the doubt, are likely disappointed. There was no “rabbit out of a hat” moment.
The address started off with a multi-layered approach to disruption from the EFF, and in a sense they managed to score a strategic draw against the speaker of the National Assembly – they got thrown out but did not have to be forcibly removed with violence, as occurred last year.
No sense of urgency
However, on the messaging front, they won a victory, with the term “Zupta” now given wide prominence on TV and social media – the elision of Gupta and Zuma was chanted as they left the chamber.
In the substance of the speech itself, we struggled to find some meaningful new policies to boost current and potential growth and ultimately provide the necessary microeconomic structural reforms needed to avert sub-investment grade.
There was no sense of urgency or crisis on the lack of a job’s creation forecast for this year. Indeed this is a factor we have commented on throughout the last year from our interactions with the ANC and something which seems not to have changed.
True, the speech was “sombre”, but we think this reflects more the personal political pressure Zuma is under as opposed to recognition of the errors of Nene-gate or the state of the economy.
The broad sense was of a speech written in parts heavily by the Treasury to make the right noises. This came through, as expected, in talk of belt tightening, the need for tax increases to cover revenue shortfalls, and expenditure cuts and difficult decisions. Similarly, we think mention of better parastatal management was also down to the Treasury.
However, through these parts written by the Treasury came the sense of the rest of government and the Presidency continuing with business as usual.
Zuma laid out the difficult global backdrop, as well as some of the domestic issues and constraints (including labour relations and electricity), and went on to acknowledge the need to avoid a ratings downgrade given its impact on the poor.
He went on to say that “decisive action was needed” and that “much can be done to improve local conditions” – but the speech did not deliver this even in the broadest terms.
There were no shock-and-awe moments to show decisiveness, no pulling of rabbits out of a hat to show a different way of thinking, and no recognition that business as usual was insufficient. On top of this, expectations were built up a lot ahead of the address, particularly for locals, but it seems they are being disappointed.
Ultimately, we think the speech shows that Finance Minister Pravin Gordhan does not have as wide ranging remit over wider government policy as people had come to expect.
Additionally, it shows the government does not understand that fiscal policy is not enough to save the country from sub-investment grade, but it is a mind-set change that is needed on microeconomic policy that was not evident here.
Overall we think the speech is negative for the rand and South African assets in the medium run but a difficult theme to trade in this current weak dollar environment. We maintain our views of a path in the coming 18 months towards two agencies in sub-investment grade and of a credit story developing in the second half of the year (overwhelming a dollar weakening story) for the rand.
Broadly, there was no departure from the ANC national general council meeting last November and the policy direction it laid out, or indeed the January 8 ANC anniversary speech Zuma gave or the more recent ANC national executive committee Lekgotla. All this shows to us that fundamental policy direction is not changing.
The question will arise of whether everything is being left up to Gordhan and his Budget on February 24. We doubt that. First, we think specific hints would have been given here today, even if details waited till the Budget.
Treasury’s constraints
Second, the left-wing policy content of Thursday’s speech shows the political constraints still around the Treasury even if they do have more space on fiscal and parastatals. But we shall wait and see.
Here are some specific takeaways:
* Fiscal conservatism was heavily put forward, including the need for tax increases and spending cuts. A focus was made on cutting ministerial travel and considering the removal of two centres of government (Pretoria and Cape Town). The first is a repeat of Budget 2013 and the impact on the fiscus is small. The latter has been considered since 1994 but never happened. It would save about R500 million to R750m a year, but that would be offset by the cost of building a new parliament in Pretoria. It would also take five to 10 years for net savings to be achieved. Overall we were satisfied on the fiscal side, however, that a cohesive consolidation plan for the deficit and a budget that broadly hangs together will come later this month. There was no mention of wealth tax.
* Left-wing policies were pushed, as expected, with a focus on the elections to come (the date of which was announced as May 18). Minimum wage was mentioned as an urgent policy, though specific timelines of implementation were not mentioned. Land reform featured heavily with the announcement of new land claims.
The ban on foreign land ownership and a bill to this effect were mentioned, which will come forward in the second quarter and are deeply non-investor-friendly. There was pushback against mining job losses, as expected, but with few details on alternate options. There will be a state pharmaceutical company (a long-time ANC policy).
* We were a little surprised that the ban on foreign land ownership was given such prominence, and while leasing will be possible, this is a classic example of policy going in the wrong direction to help growth.
* There was a lot of mention of historic redress and the need for “radical economic transformation” (which is not ratings friendly), though this was tempered by an interesting first – an admission of the need for private enterprises to make profit.
* A report from the Presidential review on parastatals was promised to be forthcoming and implemented to improve financial sustainability. However, there was no mention of putting private sector management in place, which was a key suggestion from recent chief executive meetings with the president. There was no mention of privatisation, though “defunked” parastatals would be closed (but we think this is not a new policy).
* There was a very conspicuous absence of any mention of tackling corruption, which was very odd – it has always been mentioned in previous speeches.
* There was a surprising lack of any mention of basic education.
* The new one-stop shop for investments and an inter-ministerial investment promotion committee were mentioned, but these are not new policies. Equally, the need to remove regulatory blockages was mentioned, but no specifics given.
* We found the review of past policies too overly optimistic. For instance, boosting private sector investment was trumpeted, yet real private gross fixed capital formation grew by only 0.3 percent vs a 2010-14 average of 4.3 percent and a pre-crisis average of 9.4 percent. This was similarly the case on positing recognition of mining sector concerns on regulatory uncertainty, which are now several years old.
* There was mention of increased reliance on non-market funding, talking about Brics development bank funding to be announced in April and $10 billion (R158m) of China investments promised.
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Peter Attard Montalto is an executive director and senior emerging markets economist and strategist at Nomura.
** The views expressed here do not necessarily reflect those of Independent Media.
SUNDAY INDEPENDENT