Ramaphosa Rolls the Dice to Rouse Slumping South African Economy
(Bloomberg) -- South African President Cyril Ramaphosa pushed some of the right buttons with a reform package to tackle a massive task: revive an economy battered by recession during an emerging-market sell-off.
The “stimulus and recovery plan” Ramaphosa announced Friday will redirect 50 billion rand ($3.5 billion) to projects that can spur growth and cut into South Africa’s 27 percent unemployment rate. He proposed a multibillion-dollar infrastructure fund and new rules for the mining and energy industries. A review of power, rail and port tariffs and less onerous visa requirements are also on the table.
With general elections looming next year, an improving economy should help Ramaphosa’s ruling African National Congress regain support lost during the scandal-marred administration of Jacob Zuma that ended when the ANC forced him to quit in February.
While the reforms are a step in the right direction, more detail is needed to know if they’ll work, according to Gina Schoeman, an economist at Citigroup Global Markets.
“The messaging was very good and that’s certainly a positive. The difficulty here is trying to work out what the growth implications are,” she said by phone. “We will hopefully be taking money from inefficient areas and starting to spend it more efficiently.”
Africa’s most-industrialized economy is in dire need of pep. It contracted in the first and second quarters, and the central bank projects just 0.7 percent growth this year. With the country clinging to its last investment-grade credit rating from Moody’s Investors Service, the recovery plan has to be implemented within existing spending limits.
The government will reveal how it will redirect the funds in the mid-term budget next month. The government was committed to its existing fiscal framework and is able “to live within its means,” Finance Minister Nhlanhla Nene said in an interview on Johannesburg-based broadcaster eNCA Friday. Ratings companies are watching South Africa “keenly” and it’s essential to ensure that plans to revive the country’s economy are implemented effectively, he said.
A revised mining charter, to give the industry greater certainty on ownership requirements for black investors and mining communities, will be published next week, while the allocation of additional spectrum to mobile-network operators is expected soon. Home Affairs Minister Malusi Gigaba is due to release new visa rules on Sept. 25 that will make it easier for tourists to visit and companies to hire foreigners with scarce skills.
In announcing the package, Ramaphosa, a 65-year-old lawyer and former labor union leader who served as Zuma’s vice president for four years, conceded that the economy is facing serious headwinds outside of South Africa’s control, alluding to U.S. President Donald Trump’s trade wars and the general loss of confidence in emerging markets.
“In recent months, the structural weaknesses in our economy have been made worse by global factors such as a rising oil price, weakening sentiment towards emerging markets and deteriorating trade relations between the U.S. and other major economies,” he told reporters in Pretoria, the capital.
While his steps to remove policy uncertainty constraining growth in the mining, telecommunications and tourism industries are “very good news,” spending cuts by some departments may prove difficult, said Jeffrey Schultz, an economist at BNP Paribas South Africa.
“We can’t take from social grants, free tertiary education, national health insurance,” he said by phone. “Will it come from a smaller public service? We are quite skeptical on the ability to reprioritize the budget meaningfully to move to needle on growth and investment in the short term.”
The plan sees economic growth being largely driven by infrastructure investment, with the government contributing 400 billion rand over the next three fiscal years, mainly from within the existing budget, and additional funds coming from the private sector.
“We have got a recognition that unless the government moves, no one else is going to move in this economy,” Public Enterprises Minister Pravin Gordhan said in an interview with the state broadcaster after the plan’s announcement. “The government is prepared to lead, act as a catalyst, provide funding.”
Market reaction was muted, with the rand declining 0.2 percent to 14.3212 to the dollar in Johannesburg on Friday after initially gaining during the announcement. The currency has slumped 13.5 percent against the greenback this year, as the ANC’s plans to change the constitution to ease expropriation of land without compensation to address racially skewed ownership patterns compounded the emerging-market jitters.
Ramaphosa has insisted that there won’t be a land grab. On Friday, he announced the appointment of a panel of 10 experts, led by public policy expert Vuyokazi Mahlati, to advise the government on how to implement land reform in a way that also increases agricultural output, promotes growth and protects food security.
“The stimulus package demonstrates the government’s appetite to do things differently to rectify the economy’s structural defects,” said Tanya Cohen, the chief executive officer of lobby group Business Unity South Africa. “Much more needs to be done to get the economy on a growth course.”
©2018 Bloomberg L.P.