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Last week Thursday during his State of the Nation, president Ramaphosa dared to dream again. This time, dreaming about a smart city in Lanseria. CNBC Africa&#8217;s Karabo Letlhatlha went to find out more about the president’s dreams, a smart and 5G ready city that will be a benchmark for green infrastructure on the continent and the world over.</p>


Ramaphosa: Smart Cities and cold realities

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Yesterday’s sitting of the much anticipated State of the Nation address did not disappoint on the drama but many are reviewing key points made by Cyril Ramphosa such as private power production, the plan to establish a state bank and the crisis of unemployment. Joining CNBC Africa to unpack the SONA address is Sanisha Packirisamy, Economist at Momentum Investments, Kwena Mabotja, Africa Director for SAP Next-Gen and a Mandela-Washington Fellow and Xolisa Nqodi, Managing Director of Shesha Tuks.</p>


Tracking business

Tracking business, market reaction to Ramaphosa’s State of the Nation Address

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President Cyril Ramaphosa’s 2020 State of the Nation Address is going to be a pivotal one with both ratings agencies, investors and the business community holding their collective breaths to see whether the President would finally implement meaningful structural reforms necessary to kick-start a stagnant economy. Joining CNBC Africa to break down these expectations is Andrew Duvenage, Managing Director, NFB Private Wealth Management and Ralph Mathekga, political analyst and Annabel Bishop, Chief Economist, Investec.</p>


#SONA: What business

#SONA: What business, investors want

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<p>Unathi Sonwabile Henama Tourism lecturer at TUT argues that South African draconian aviation laws such as 75 per cent ownership of domestic airline- being owned by South Africans, has led only to limited competition and expensive aviation prices.</p>


Why SAA should privatise

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<p>Following the spate of xenophobic attacks in South Africa, many businesses with African operations have been affected as property and stock has been damaged and violence against employees has resulted in death. The South African Chamber of Commerce and Industry has called on business leaders and the police top brass to find a solution to the ongoing violence against other Africans in South Africa. CNBC Africa&#8217;s Kopano Gumbi spoke with SACCI CEO, Alan Mikoki for more.</p>


The cost of xenophobic attacks on businesses in Africa

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<p>CNBC Africa&#8217;s Fifi Peters spoke with the Public Enterprises Minister Pravin Gordhan on the future of state owned enterprises in South Africa.</p>


World Economic Forum: Minister Pravin Gordhan on the future of SOEs in SA

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<p>South Africa has suffered more than a few knocks in the face of its economic stability. In spite of this Deal Leaders Africa says its business in mergers and acquisitions is painting a completely different picture. Joining CNBC Africa for more is Andrew Bahlmann, MD at Deal Leaders Africa.</p>


SA economy: Why it’s not all doom and gloom

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<p>The future of South Africa after the dark days of Zuma’s reign is slowly coming to an end.</p>


Trevor Manuel speaks about the Zuma years, damage done to SOEs and Ramaphosa’s investment drive

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<p>South African businesses especially state owned entities continuously battle with making profits, with introduction of various turnaround strategies seemingly not taking off. One global group which is business of assisting companies ensure their turnaround strategies are a success is Turnaround Management Association. Bruce Berry, CEO of Turnaround Management Association Southern Africa joins CNBC Africa to talk about how they ensure such happens.</p>


Turnaround strategies made a success by a global association

<p>By Moody&#8217;s Investors Service</p>
<p>London, 23 March 2018 &#8212; Moody&#8217;s Investors Service today confirmed the long-term issuer and senior unsecured ratings of the Government of South Africa at Baa3, as well as the (P)Baa3 senior unsecured shelf and senior unsecured MTN program ratings. The outlook was changed to stable. The rating actions conclude the review for downgrade that commenced on 24 November 2017.</p>
<p>The confirmation of South Africa&#8217;s ratings reflects Moody&#8217;s view that the previous weakening of South Africa&#8217;s institutions will gradually reverse under a more transparent and predictable policy framework. The recovery of the country&#8217;s institutions will, if sustained, gradually support a corresponding recovery in its economy, along with a stabilization of fiscal strength.</p>
<p>The stable outlook reflects a careful balance of risks. The new administration faces equally significant opportunities and challenges. Steady progress in meeting the objectives set out in the President&#8217;s recent State of the Nation Address (SONA) will be needed if the recovery in confidence that will be essential for the country&#8217;s economic and fiscal prospects is to be sustained. Success offers the prospect of a virtuous circle of economic recovery, fiscal consolidation and rising social cohesion. But the political, policy and practical challenges of meeting diverse economic, social and fiscal objectives cannot be underestimated. Failure, at least as perceived by investors or voters, could lead to a further cycle of eroding economic, fiscal and institutional strength.</p>
<p>In a related decision, Moody&#8217;s confirmed the government&#8217;s other short-term rating at (P)Prime-3. Moody&#8217;s also confirmed the Baa3 backed senior unsecured debt issued by ZAR Sovereign Capital Fund Propriety Limited, a special purpose vehicle whose debt issuance is ultimately the obligation of the South African government, and changed the outlook to stable.</p>
<p>South Africa&#8217;s long-term local-currency bond and bank deposits ceilings remain unchanged at A2, and the long-term and short-term foreign-currency bond ceilings are also unchanged at A3/Prime-2. The long-term foreign-currency bank deposits ceilings remain at Baa3, while the short-term foreign-currency bank deposits ceiling remains at Prime-3.</p>
<p>RATINGS RATIONALE</p>
<p>RATIONALE FOR CONFIRMING THE Baa3 AND (P)Prime-3 RATINGS</p>
<p>FIRST DRIVER &#8212; HALT IN THE DETERIORATION OF SOUTH AFRICA&#8217;S INSTITUTIONAL FRAMEWORK, WITH LONG-STANDING STRENGTHS PRESERVED AND SOME REBUILDING OCCURRING</p>
<p>The recent change in political leadership appears to have halted the gradual erosion of the strength of South Africa&#8217;s institutions. With changes in governance, a number of key institutions, including the Treasury, the South African Revenue Service (SARS) and key State-Owned Enterprises (SOEs) have embarked on the recovery of their earlier strength.</p>
<p>The technical strength and independence of South Africa&#8217;s media, civil society and institutions, including key ministries, the Reserve Bank and the judiciary, have been critical in sustaining the country&#8217;s credit profile over time. However, recent years have seen a gradual erosion in the strength of some key institutions, with a correspondingly negative impact on economic and fiscal strength and on the effectiveness of policymaking. High and rising concerns regarding endemic high-level corruption, &#8216;state capture&#8217; and pressures on the mandate and independence of key policy-making institutions such as the Reserve Bank have materially damaged economic confidence and effective policy-making, exacerbating the erosion in the government&#8217;s balance sheet.</p>
<p>Examples of the erosion of the government balance sheet are diverse, but include the increasingly entrenched financial challenges facing key SOEs, the decline in the capacity of SARS to collect revenue for the government and, most recently, the absence of any clear policy direction in the Medium Term Budget Policy Statement (MTPBS) published in October 2017, a key driver of Moody&#8217;s recent review of South Africa&#8217;s credit rating.</p>
<p>The recent change in political leadership offers a real prospect of a decisive reversal in that erosion of strength. While it is still very early days, the speed with which the President has moved to replace the leadership in key institutions, including the Ministries of Finance, Mineral Resources and Public Enterprises and most recently in SARS, illustrates the resolve to address the problems of the recent past and to set the state, society and the economy on a new and positive path. At the same time, the ambitious reform agenda set out in the SONA illustrates an acknowledgement of, and the intent to address, the range and depth of South Africa&#8217;s economic, fiscal and social problems.</p>
<p>SECOND DRIVER &#8212; IMPROVED GROWTH PERFORMANCE AND PROSPECTS</p>
<p>The change in political leadership comes in parallel with growing signs of cyclical, and perhaps structural, improvements in economic growth.</p>
<p>2017 was the second year in a row when growth outturned higher than initially forecast. Even if the improvement was to a large extent cyclical, driven by external demand and by one-off factors such as the easing of the drought, the prospect of higher than expected growth this year and next allows the government some additional fiscal and political space in which to pursue reforms.</p>
<p>Moreover, the recovery in growth has been mirrored more recently by a sharp recovery in business and consumer confidence, illustrated both in surveys, and by other indicators such as the recent recovery in the value of the rand. While confidence can dissipate quickly, if sustained through further actions, it offers the prospect of rising levels of investment in South Africa&#8217;s economy and enhanced medium-term growth.</p>
<p>The government recognizes the need to support improving confidence with steady progress on structural reform, including in the areas of mining, energy, the SOE sector and competition. Future growth prospects will inevitably reflect its progress in those areas. For now, though, the enhanced political and policy certainty ushered in by the recent changes offers some confidence that renewed business confidence will be sustained.</p>
<p>THIRD DRIVER &#8212; FISCAL ADJUSTMENT PLANS THAT WOULD STABILIZE AND EVENTUALLY REDUCE THE DEBT BURDEN</p>
<p>In marked contrast to last October&#8217;s MTPBS, the 2018 budget outlines a clear strategy for addressing rising fiscal pressures, with a front loaded, revenue-driven, fiscal adjustment, supported by material cuts in expenditures in this and subsequent years needed to finance, inter alia, rising expenditure on education.</p>
<p>The recently-announced one percentage point increase in VAT will broaden the fiscal policy response beyond the expenditure controls on which the government has increasingly relied in recent years. However, its significance goes beyond the moderate increase in revenues (of around Rand 22 billion) that the increase will allow. As the first increase in indirect taxes for over two decades, the change signals a marked, and credit positive, policy shift.</p>
<p>Overall, Moody&#8217;s now expects the government&#8217;s debt burden to stabilize at around 55% of GDP over the 2018-2020 period.</p>
<p>Significant uncertainties remain, and risks are tilted to the upside. Over the near-term, the departmental cuts required to support (inter alia) the increased spending on education announced under the previous Presidency will test policymakers and administrators alike. Hard political choices will arise; spending pressures from, for example, public wages and the cost of higher education, will persist. The still-fragile state of many SOEs, in particular Eskom Holdings SOC Limited, poses material contingent liabilities.</p>
<p>Set against that, a continued recovery in growth would boost revenues and provide further policy space.</p>
<p>RATIONALE FOR A STABLE OUTLOOK</p>
<p>The stable outlook balances upward and downward pressures.</p>
<p>Marshalled and developed by strong institutions pursuing an effective set of reforms and policies, South Africa&#8217;s economy has significant growth potential. A combination of growth, expenditure restraint and further improvements in the breadth of the revenue base and in collection capacity should, if pursued effectively, lead to the debt trajectory stabilizing in the next two to three years and ultimately reversing. Incoming policymakers have emphasized their commitment to addressing risks to the debt trajectory growth emanating from the SOE sector.</p>
<p>However, the authority and capacity of the incoming administration remains to be fully tested. The divisions within the ANC, and more broadly within society, as illustrated by the increasingly pluralistic political environment, will present policymakers with diverse and sometimes conflicting political priorities which will create policy uncertainty. The policy agenda itself is broad and challenging, and contains elements that have the potential to create tensions within the administration and society.</p>
<p>Two immediate examples are the still-to-be-agreed Mining Charter and the land appropriation without compensation initiative. On the former, the President has emphasized his intention to balance the conflicting priorities of industry, unions and the broader goal to encourage black economic empowerment of the industrial base. Satisfactory progress in this area will be an important test of the ANC&#8217;s authority and ability to reach the compromises needed to push through a broader reform agenda. Land appropriation is a long-standing objective of the ANC which has, for a number of reasons, assumed a higher profile in recent years. It remains unclear how the new government will pursue its objectives in this area, or what impact that will have on agricultural production and security. How the government acts will also provide important insights into how it plans to balance nearer-term economic objectives (to sustain confidence and promote investment) against longer-term social and economic objectives (to address unemployment, inequality and poverty).</p>
<p>In short, the outlook reflects two possible visions for the sovereign credit ratings: the first is a positive one in which a virtuous cycle emerges of economic growth, fiscal prudence and mounting social cohesion. The second is a more negative one in which policy ineffectiveness continues to undermine confidence, growth and social cohesion, with inevitable consequences for the government&#8217;s balance sheet.</p>
<p>WHAT COULD CHANGE THE RATING &#8212; UP</p>
<p>Future rating actions will most likely be driven by the effectiveness with which the government is able to address the institutional problems of the recent past in the pursuit of its economic and fiscal reform agenda.</p>
<p>The successful implementation of structural reforms to raise potential growth as well as stabilize and eventually reduce the debt burden, including through reforms to the SOE sector which reduce contingent liabilities, would put upward pressure on the rating. In particular, reforms resulting in higher savings and investment rates and broad-based, sustainable, job-creating growth, alongside rebuilding of fiscal buffers would provide positive momentum to the rating. In reaching such a conclusion, Moody&#8217;s would consider the longer-term ramifications of near-term fiscal and economic outcomes, as well as progress in enacting reform measures and resolving long-standing structural issues, including those relating to mining and agriculture.</p>
<p>WHAT COULD CHANGE THE RATING &#8212; DOWN</p>
<p>Conversely, South Africa&#8217;s ratings would be placed on negative outlook or review for downgrade, and eventually downgraded if it were to become clear that the government&#8217;s commitment to, or capacity to engineer, revived growth and debt stabilization were to falter. In reaching such a judgment, Moody&#8217;s would consider the government&#8217;s success in delivering planned structural reforms in the period between now and the 2019 Presidential elections, and to the impact of its actions or inaction on the investment climate and on near-term and potential growth. Negative developments in fiscal policy would also weigh on the rating. This includes the potential for SOE sector risks crystallizing in a manner which raised the government debt burden and put it on a higher trajectory.</p>
<p>GDP per capita (PPP basis, US$): 12,321 (2016 Actual) (also known as Per Capita Income)</p>
<p>Real GDP growth (% change): 0.3% (2016 Actual) (also known as GDP Growth)</p>
<p>Inflation Rate (CPI, % change Dec/Dec): 7.1% (2016 Actual)</p>
<p>Gen. Gov. Financial Balance/GDP: -2.5% (2016 Actual) (also known as Fiscal Balance)</p>
<p>Current Account Balance/GDP: -3.2% (2016 Actual) (also known as External Balance)</p>
<p>External debt/GDP: 52% (2016 actual)</p>
<p>Level of economic development: Moderate level of economic resilience</p>
<p>Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.</p>
<p>On 20 March 2018, a rating committee was called to discuss the rating of the South Africa, Government of. The main points raised during the discussion were: The issuer&#8217;s economic fundamentals, including its economic strength, have materially increased. The issuer&#8217;s institutional strength/framework, have materially increased. The issuer&#8217;s governance and/or management, have materially increased.</p>
<p>The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.</p>
<p>The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.</p>


Moody’s gives SA reprieve, keeps rating one notch above junk

<p>South Africa will announce details of wide-ranging reforms at state-owned firms within four weeks, the public enterprises minister said on Tuesday, as government seeks to return credibility to companies hobbled by graft and mismanagement.</p>
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<p class="">The control board members have over procurement at state companies, one of the main processes alleged to have been abused by officials in the past, will be changed within two to three months, Pravin Gordhan told a union meeting.</p>
<p class="">He said new board members will be appointed to state firms in need of reform within two to three months, without naming the companies.</p>
<p class="">Gordhan, a popular figure with investors, was appointed by President Cyril Ramaphosa in a cabinet reshuffle last week with the mandate to clean up state firms that have become a burden on government finances and a focus of ratings agencies.</p>
<p class="">Gordhan served as finance minister from 2009 until 2014 and again from 2015 until 2017 but was fired by scandal-plagued former president Jacob Zuma after openly criticising the corruption in his government.</p>
<p class="">“We’re on a good wave of change in South Africa,” Gordhan told union members and reporters in Pretoria.</p>
<p class="">“Hopefully in the next 4 or so weeks one will be able to say these are the ten steps that we’re taking.”</p>
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<p class="Attribution_content_27_rw">Reporting by Nqobile Dludla; Writing by Joe Brock; Editing by James Macharia</p>
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South Africa to reform state firms after graft scandals: Gordhan

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<p>South Africa is finally moving in the direction that potential investors want to see before they place their very expensive faith in the economy of the country; this was the sentiment expressed by Rob Davies, SA&#8217;s Minister of Trade and Industry.</p>


Management of SOEs have become a drag on economy – Rob Davies

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<p>In a media briefing on the government employees’ pension fund and PIC’s investment’s process and approval CNBC Africa spoke to Abel Sithole, Principal Executive Officer at GEPF on the reduction in pension fund returns and the safety of government employees pensions from being used to save sailing SOEs.</p>


SA’s sluggish economic performance impacts Government Employees Pension Fund

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<p>Following the announcement of SAA&#8217;s new board, the Standing Committee on public finance released a statement saying the real test of the new Board is how they bring their range of experiences and expertise together and operate as a collective. The statement bemoaned the lack of aviation expertise among the board. CNBC Africa spoke to Chairperson of the Standing Committee on Finance, Yunus Carrim.</p>


Can the new SAA board save the airline?

<p><span class="articleLocation">JOHANNESBURG</span> (Reuters) &#8211; South Africa&#8217;s Public Protector has launched a new investigation into allegations of influence-peddling and unlawful enrichment by certain officials within three state-owned firms after thousands of emails relating to alleged fraud were leaked.<span id="midArticle_byline"></span></p>
<p>The Public Protector&#8217;s office said in a statement on Wednesday it was investigating these allegations within Eskom, Transnet and The Passenger Rail Agency of South Africa (PRASA).</p>
<p>Allegations of government corruption have escalated this month after local media began reporting on more than 100,000 leaked emails they say show inappropriate interference by the wealthy Gupta family and ministers in the issuing of lucrative tenders.</p>
<p>&#8220;The Public Protector South Africa, Advocate Busisiwe Mkhwebane, has decided to conduct a preliminary investigation for the purpose of determining the merits of the several allegations published in the media,&#8221; the protector&#8217;s office said.</p>
<p>The latest allegations of influence-peddling are deepening a divide in the ANC as factions jostle for control before a conference in December where President Jacob Zuma&#8217;s successor as party leader will be chosen.</p>
<p>The investigation by the anti-corruption watchdog will focus on allegations of &#8220;improper or dishonest act&#8221; with respect to the public funds at Eskom, PRASA and Transnet and &#8220;unlawful enrichment&#8221; by certain public officials at the firms, it said.</p>
<p>The investigation will also look at the re-appointment of Brian Molefe as chief executive of Eskom, the state power company, amid graft allegations. He was reinstated last month, but ministers then reversed his reinstatement.</p>
<p>Molefe has denied wrongdoing and the Gupta family, who are friends of Zuma, and its companies have also denied all allegations of influence-peddling or improper dealings.</p>
<p>Most of the allegations form part of &#8220;The State Capture&#8221; report by the Public Protector, released last year on Nov. 2, focusing on allegations that businessmen brothers Ajay, Atul and Rajesh Gupta had influenced the appointment of ministers.</p>
<p>The report has been taken on judicial review by Zuma, mines minister Mosebenzi Zwane and Minister of Cooperative Governance and Traditional Affairs Desmond van Rooyen, the public protector said.<span id="midArticle_byline"></span></p>
<p>(Reporting by Nqobile Dludla; Editing by Chris Reese and Leslie Adler)</p>


S.Africa’s Public Protector launches probe of influence-peddling in state-owned firms

<p>The trend worldwide is for wealthier countries to have large governments. South Africa has a government larger than expected and still growing steadily. The international trend for poorer countries is to have many State Owned Enterprises (SOEs), and government investment a larger fraction of the total. South Africa has more SOEs and government investment than is normal for a country at our level of development.</p>
<p>A recent assessment reported no fewer than 717 SOEs in South Africa with total assets of R1 trillion, or 27% of GDP, and government investment amounting to more than 30% of our total investment.</p>
<p>As can be seen from South Africa’s Tax Freedom Day*, which this year falls on May 25, same as last year but six weeks later than in 1994 and a full 2 months later than 1972, SOEs are a substantial burden on the taxpayer and economy.</p>
<p>Orthodox economics says that return on investment in government is lower than in the private sector because, in an SOE, the incentives of stakeholders and the associated bureaucracy, as well as the lack of competition, do not encourage efficiency or innovation. Our government has admitted as much. In its report on SOEs, it stated that, over the five years up to 2014/15, the return on investment in SOEs had declined to a low 2.9%.  Shifting resource allocation from private enterprise to government slows down growth which, long term, adversely affects welfare.  A 2%, rather than a 1%, per capita growth rate, over 70 years, would result in double the relative welfare</p>
<p>Some SOEs are so inefficient that they make large and/or persistent losses. An obvious example is SAA, which has cost treasury more than R35-billion in bailouts since 2007. Government says it has no plans to get rid of or to privatise SAA even though there is no good reason to keep it. The purpose of an SOE is not to create jobs, but to supply a valued public service. Employing almost as many people, private companies competing for air routes and customers could supply a far better service without making a loss (at least not one for tax payers to bear). The same applies to all of the other SOEs.</p>
<p>Bad as it is, SAA is not nearly the largest loss maker among South Africa’s SOEs. In 2014/2015, five SOEs managed to lose R20.6-billion or 2% of government revenue. It may not sound like much, but it would have been enough to roughly double the rate of housing delivery – not to mention the thousands of building jobs that this would entail.</p>
<p>No matter whether SOEs are profitable or not, they create a direct drag on the rest of the economy through being protected from competition, and an indirect drag by being a large, wasteful fraction of the economy. Protecting inefficient enterprises, or shoring them up, slows the growth of productivity and reduces the number of sustainable jobs that would result from a growing economy.</p>
<p>To sum up, SOEs are unnecessary for welfare and employment; inefficient or downright wasteful enterprises; a drag on the economy; create major opportunity costs; expose the treasury to significant risk and the country to bad investment ratings.</p>
<p>Another area where the South African government underperforms is in keeping peace and providing justice and good governance, i.e. rule of law.  Government has no business doing anything unless it has provided for adequate rule of law.  Providing a sound justice system is costly and there is a tight relationship between government consumption and good law indices.  Nevertheless governments do vary in how much they spend to provide a given level of rule of law.  By international standards, and the current level of government consumption, rule of law in South Africa falls short by 26-27%.  Alternatively, given our current state of rule of law, government consumption is 26-27% too high, and, arguably, we need a much better justice system than is being provided for.</p>
<p>By any reasonable standard, South Africa has far too many of SOEs and far too little rule of law.  To invest in better rule of law without increasing the tax load to higher growth sapping levels, we need to end wasteful and unnecessary SOEs.</p>
<p>* Tax Freedom Day (TFD) is the day after which South Africans have worked enough days to pay their taxes. Tax Freedom Day is calculated by dividing general government revenue by GDP for a calendar year, applying this fraction to the number of days in a year, and adding a day. TFD 2017 falls on May 25.</p>
<p>&nbsp;</p>
<p><strong>Author:</strong> Garth Zietsman is a statistician and consultant.</p>


Op-Ed: South Africa sacrifices peace, justice, and good governance to SOEs

<p>By now everyone has had some time to digest the Budget Speech, and specifically how the R28 billion increase in the tax burden that largely falls on individuals will impact us. The new top marginal tax bracket of 45% only applies to 103 000 taxpayers, who will on average pay R3 500 per month more in income tax. There are 7.4 million registered individual taxpayers in South Africa, but  6.5 million fall below the threshold income and don’t pay income tax.</p>
<p>The immediate market reaction to the Budget was fairly positive, but South African markets are so closely connected to global markets that it is often difficult to disentangle domestic from foreign drivers. Ultimately, one wouldn’t expect a big market reaction because the October mini-Budget already gave clear direction; last week was just a case of giving us the details.</p>
<p><strong>Commitment to narrow the deficit</strong></p>
<p>The 2017 Budget retains a commitment to narrowing the budget deficit to an internationally acceptable level of 2.6% of GDP over the medium term and stabilising the government debt to GDP ratio. Fortunately, unlike the previous four years, the global climate is more favourable this year. Global economic activity is speeding up, especially in Europe where economic growth has reached its fastest rate in six years and positive business and consumer sentiment suggests that it will be maintained.</p>
<p>Similarly, Japan is enjoying decent growth (by its standards). US economic growth is strong enough for the Federal Reserve to consider an interest rate increase soon. Commodity prices have firmed up substantially over the past year, and investor sentiment towards emerging markets has improved, reversing the sustained capital outflows of the previous five years. When Minister Gordhan delivered the Budget Speech last year – soon after he was parachuted into the position – the rand was at R15.26 against the US dollar. Last week, it closed at R12.94.</p>
<p>South Africa benefits from all these trends, and the local economic outlook has therefore improved. In the short term, fiscal consolidation is a drag on economic growth, but should not derail this recovery. Whereas the economy barely grew in real terms last year, Treasury expects growth to rise to 2.2% over the next three years. These numbers represent an improvement off a low base, however, and will not dent the unemployment rate.</p>
<p>Perhaps the biggest criticism of the Budget was the lack of reform announcements and measures to stimulate growth. But it is important to remember that the Minister of Finance and the National Treasury control Government’s finances and not economic policy and implementation.</p>
<p><strong>Hurdles for a ratings reprieve</strong></p>
<p>Consider the ratings outlook, for instance. In a recent panel discussion, S&amp;P Global’s local representative reiterated that South Africa’s ratings hinge on three issues. Firstly, expectations for improvement in economic growth and fiscal performance. Secondly, signs of weakening institutions would put downward pressure on ratings since it could lead to a deteriorating investment climate. Thirdly, risks posed to Government’s finances by the State Owned Enterprises (SOEs).</p>
<p>Of the above, the Minister only has direct control over the fiscal performance, and even there not as much as he would like. To begin with, the overall thrust of fiscal policy is a Cabinet decision, not Treasury’s alone. But the actual outcome of fiscal policy is dependent on the performance of the economy. The problem over the past four years has precisely been that the weak economy has put tax revenue under pressure. Complicating matters somewhat is that the economy responds to fiscal policy too. For instance, sharp tax hikes could choke off the nascent recovery. On the other hand, tax incentives can encourage growth and job creation in targeted sectors, as the World Bank recently pointed out.</p>
<p>South Africa’s institutional strength was stress-tested last year. When flimsy charges were brought against Pravin Gordhan, the combination of media freedom, a vibrant civil society and independent courts prevailed. And our central bank was willing to hike rates to maintain its inflation-fighting credentials even though there was an election around the corner. The election itself and the subsequent peaceful transfer of power in key metros also demonstrated the strength of our institutions. Few, however, doubt that 2017 will see further strains as we gear up for the ruling party’s elective conference at year-end. Major policy shifts before the conference are unlikely.</p>
<p>In terms of the SOEs, there is some control by Treasury, since Treasury signs the guarantees that make up Government’s contingent liabilities of around 10% of GDP. But the overall structure, objectives and governance of the SOEs rests with Cabinet, not with Treasury. The financial underperformance of the large SOEs &#8211; the return on equity of the 16 largest SOEs in the 2015/16 fiscal year was only 0.8%, well below any reasonable estimate of the cost of capital &#8211; is not only a drag on the fiscus, it can also hamper economic growth.</p>
<p>It is also important not to lose sight of South Africa’s ratings strengths. These include world-class financial markets and a well-capitalised banking sector. Government is therefore not dependent on borrowing in fickle foreign markets, exposing it to currency swings (foreign debt is only 10% of the R2 trillion total).</p>
<p>As long as economic growth improves in the short term, and provided there is no institutional deterioration, South Africa can hold on to its investment grade rating. This would be a positive surprise, given that global market pricing places us in the same camp as other “junk” economies like Russia and Brazil.</p>
<p><strong>Structural reform needed</strong></p>
<p>Faster economic growth over the longer term is not only important for job creation, it is also necessary for fiscal sustainability as it will lead to growing tax revenues for Government, which can be spent on welfare, education and health without resorting to additional borrowing. Structural reforms to lift the long-term growth rate include lowering barriers of entry to increase competition between firms, providing young people with easier access to the job market, ensuring fewer strikes, improving transport infrastructure, attracting skilled immigrants until such time as our own people are better equipped, effective land reform and greater regulatory certainty, especially in capital-intensive industries like mining.</p>
<p>The first chapter of the Budget Review highlights that 2016 was the first year private fixed investment contracted since global recession, a sign of rock-bottom confidence. It then lists a number of items on Government’s to-do list that could lift investment (including finalising mining regulation, expanding the independent power programme, and concluding analogue to digital migration) where responsibility rests with other departments within Government. Unsaid, of course, is the lack of certainty around the position of the Finance Minister, which has drained business and investor confidence over the past 14 months.</p>
<p> </p>
<p>Chart 1: Rand-dollar exchange rate</p>
<p> <img loading="lazy" decoding="async" src="/media/19341300/old_mutual_chart_1_27_feb_2017_598x294.jpg"  width="598"  height="294" alt="Old Mutual Chart 1 27 Feb 2017"/>﻿</p>
<p>Source: Datastream</p>
<p> </p>
<p>Chart 2: Projected consolidated budget deficits</p>
<p><img loading="lazy" decoding="async" src="/media/19341307/old_mutual_chart_2_27_feb_2017.png" width="568" height="265" alt="Old Mutual Chart 2 27 Feb 2017"/>﻿</p>
<p> </p>
<p>Source: National Treasury﻿</p>


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