Foreign investors and rating agencies are watching every event, especially politics. The magnifying glass is out after Nenegate.
I AM no fan of hyperbole, but this year strikes me as possibly the most important year since 1994 for the economy, the medium-run direction of policy and SA’s potential for job creation and development.
There will be difficult political, microeconomic and macroeconomic choices to make in such a weak foreign and domestic growth environment. SA will be at a nexus dealing with a substantial terms-of-trade shock and Chinese slowdown, amplified by the negative effects on domestic sentiment from the political risk premia shock last month and the government’s policy choices in recent years. Add succession battles within the African National Congress (ANC), a raft of left-leaning policies as outlined in the party’s January 8 anniversary statement and a need to keep investors onside…. That is a fiery mix of risks.Investors and businesses that can understand and navigate these currents will be best placed to outperform. Indeed, I expect the result to be growth of just 0.9% this year. Our forecast does not include two quarters of negative growth — a technical recession. But I would characterise this year as a “feels like recession” year, and indeed that is what should matter to the government.
No jobs a shock signal for change
The best way to crystallise this is to say there are likely to be no (net) new jobs created in the economy for the first time since 2010, although the rate of jobs growth in recent years has already been inadequate to reduce unemployment. No job growth in so many countries is generally a shock signal for change — the question is in which direction, for the government and SA.I think next month will be the most important month, through which we should get a good sense of the direction of policy. The answer may well be confusing though. Cognitive dissonance may be the order of the day — a challenging state of the nation address for business and foreign investors (and rating agencies), but followed by a decent budget that does (in a somewhat threadbare fashion) hang together okay. These divergent forces for investors and local business mean we need to understand what is important over the medium run.
Rewinding to Nene-gate
Rewind to Monday, December 7, before the Nene-gate saga, just after the rating agencies’ downgrades the Friday before.We are currently in a position not that different to then — trusting the Treasury to deliver the goods in the political space it is given, but doubting the size and shrinking nature of that political space. With Finance Minister Pravin Gordhan at the helm, investors are more confident that the space in which the Treasury can operate is slightly bigger. But the concern is that it is not that much expanded, and that thinking about it like this in the short run misses the point.Rating agencies’ reports and feedback from investors since last month indicate that the fiscal situation is not the primary concern. The situation is only a concern as a secondary consequence of wider (particularly micro-) economic policy choices by the government, and the political backdrop. The concern is what effect these policy shifts will have on growth, and then fiscal and debt risks and sustainability in the long run.
Again, we return to the idea of how the state of the economy and the political space in which the Treasury has to operate are central. Therein lies the important juxtaposition of the state of the nation address and the budget.I think investors and rating agencies will be happy with tax hikes and continued cuts to keep expenditure under its ceiling, although there will be a real test of what macro forecasts are used because the International Monetary Fund has now cut its growth projection to just 0.7% and the medium term budget policy statement forecast was 1.7%. We will, in particular, be watching the overall ZAR long-dated issuance data, which largely caused the market to sell off after the minibudget and will likely have to deteriorate again this time.However, the budget may be as good as it gets this year, both on the pure fiscal front and on the wider risk story.
This is where the state of the nation address comes in. While we already had an appetiser with the January 8 statement, this is likely to be one of the most analysed ones yet. Now investors’ eyes are firmly on the wider policy direction. We should also not forget the potential for protests at Parliament by opposition parties. Again, the question is in what direction SA moves in response to this growth shock. The government knows the budget can do little to help turn the economy around this year, but it can damage further job creation by accelerating a downgrade to junk status.
Instead, the government’s policy choice, seen through the state of the nation address, will be a minimum wage, sold as redistribution from the corporate sector, that benefits growth, revenue and employment. It will be about amplifying black economic empowerment under the existing model without fundamental reform in that area to drive true localised empowerment. It will be about more dialogue and “consensus” between the government and businesses, despite the fact that in the past 18 months, there has been a record number of meetings between the president and businesses, and with the National Economic Development and Labour Council still somewhere in the background doing this job.
Land reform and National Health Insurance are likely to appear too, wrapped into the president’s larger economic vision about redressing “300 years” of economic inequality. Indeed, that has been a key take-away from his public speeches for several months. That could well be the key defining narrative for this year, around which we need to think about policy direction.There seems little yet to shift the direction of policy from the status quo. The shock to the economy this year should be sufficiently large to drive policy forward along the existing path, but not big enough to define and then explore a new breakout path. As I said in this column last month, there are no new ideas for SA to jumpstart growth, opportunity and job creation, but old ideas need to be explored. The idea of an economic Codesa, which is increasingly being raised, could do this if all sides come with open minds and leave existing ideologies at the door, concentrating instead on aims such as maximising redistribution through job creation.
An announcement of such a forum would be a rabbit-from-a-hat for the state of the nation address and SA more generally, although its timing might be better suited to when the political environment is open to different directions and win-win agreements could be reached. I am concerned that more policies will have to be tried first, such as the minimum wage (set at a high level), before we get to a point of openness to a real Codesa-type negotiation, rather than more of the same “interactions”.
It’s going to be a bumpy ride. Foreign investors and rating agencies are watching every event, especially politics. The magnifying glass is out after Nenegate.