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Challenging State of the Nation for President Zuma

President Jacob Zuma and First Lady Nompulelo Ntuli-Zuma. Picture Credit: Gallo Images
President Jacob Zuma and First Lady Nompulelo Ntuli-Zuma. Picture Credit: Gallo Images

The State of the Nation Address (SONA) by President Jacob Zuma on 11 February is actually more important in our view than the Budget on 24 February. We watch closely – as will rating agencies – to see the broader scope of policies on issues affecting growth and the investment environment.

After possible protests and disruption from opposition parties‚ we expect a broadly left-leaning speech in terms of policy specifics outside ‘National Treasury areas’ but then a concerted and conservative segment on fiscal consolidation‚ possible hints at tax increases‚ parastatal management and investments.

We expect no major surprise policies or any major growth-boosting policies to reassure rating agencies – despite rhetoric about doing everything to secure the rating.

Markets still don’t fully grasp that rating agencies (and especially S& P) look set to downgrade South Africa in the medium run to sub-investment grade‚ not because of the budget per se but because of the lack of growth prospects and investment-friendly environment‚ which in turn throws up medium-run budget risks. For this reason we have always said that it is not fiscal policy that will be to blame for the sovereign reaching junk status but the government and the rest of policy – especially microeconomic policy.

After the political shock of three Finance Ministers in two weeks‚ opening Pandora’s box‚ in December‚ a key question has arisen as to the political power of the new (old) Finance Minister Pravin Gordhan. For this reason we see President Zuma’s SONA next week as more important than the budget later this month.

 The SONA can be thought of in three sections: firstly non-economic policy that is less important to markets (defence‚ foreign policy‚ environmental issues)‚ secondly National Treasury competency policy (fiscal‚ funding of various initiatives‚ parastatals to a degree‚ financial policy) and then wider economic or fiscal-impacting policy (industrial policy‚ labour policies‚ health care/NHI‚ education/fees‚ land reform‚ BEE issues).

The key question is how much influence can the political changes of December and Pravin Gordhan’s move back to the National Treasury have on this latter group of policy issues. We are highly sceptical on this point. We believe that Pravin Gordhan is having considerable influence on parastatals and issues like modalities of funding for education‚ but not on core issues like labour market reforms (an area he doesn’t believe needs altering anyway) or being able to prevent a high level national minimum wage. Put simply‚ we don’t believe he is having a great effect on growth-boosting policy areas and the political scope of National Treasury actions remains narrow.

However‚ we do believe that on (re-)taking the job he did extract some conditionality on fiscal and parastatals which will come out in the SONA – again hence its importance.

As such we expect the SONA (as indeed the whole of February) to suffer from a strong amount of cognitive dissonance. This should have two key parts‚ some left-leaning policy moves designed to help garner support into the local elections and to 2019 beyond; and then a core conservative ‘National Treasury’ message on fiscal and parastatals as well as long-term investment and private funding of areas like education.

The SONA is also important because it should contain a number of strong hints about the budget to come‚ possibly including on the revenue side (though we don’t think it will be specific enough as to say yes or no on‚ say‚ VAT hikes).

We see cognitive dissonance because we see the SONA saying government is doing everything to boost growth and avoid entering sub-investment grade‚ but at the same time talking about accelerated land reform‚ minimum wage and more direct government involvement in the economy. We should remember we have already had an appetiser to this SONA with President Zuma’s 8 January ANC anniversary address and interviews (which we commented on here).

Market expectations have been greatly inflated by the government since the start of the year and we think it will be difficult to meet them. Locals appear more willing to look for whatever positives they can‚ but foreign investors may well be more sceptical.

Our expectations of the SONA:

- We expect both EFF and DA to launch protest action within the chamber against President Zuma just as he is called to give the SONA. This occurred at the SONA last year and resulted in firstly the EFF being escorted from the chamber by armed‚ plain-clothed security guards and then the DA leaving in protest. Protest action will likely revolve around opposition parties’ no-confidence in Mr Zuma and the issue of Nkandla (even though the President is now open to some form of repayment). This may well delay proceedings though it seems new rules on how members of parliament can be ejected may reduce the length of any disruption. We doubt very much that the parliamentary authorities would again try to block mobile phone signals after the uproar and embarrassment that action caused last year.

-When the speech does start it will likely have two central‚ conflicting‚ themes.

- The first is what President Zuma has spoken about increasingly in recent months – correcting ‘300 years of inequality’. We expect rebalance and redress to feature strongly‚ while land reform‚ BEE changes and quotas will feature. Access to higher education and the minimum wage also falls within this area.

- The second theme is the tough economic backdrop‚ averting sub-investment grade‚ fiscal conservatism and boosting growth. We think it will be particularly hard to find substance in this section of the speech‚ though it will most likely pre-commit to spending freezes in real terms‚ likely promising to prioritise investment spending over current spending (but we don’t think the budget will actually show that) and talk about stabilising debt levels. We expect only marginal focus on any of South Africa’s economic issues being largely home-grown‚ instead concentrating on a weak global backdrop and volatile capital flows with the Fed hiking rates. As such‚ we see an ‘admission of guilt’ (personal or for government) as highly unlikely‚ and expect no mention at all of the events of December. However‚ it will be interesting to see how the President responds to these issues if they are put specifically to him in questions next week in parliament. We watch for any subtle attacks on markets or rating agencies for what happened in December (as the President did in recent TV interviews).

 We watch for any specific promises on:

- National Minimum Wage (NMW) timelines for legislation.

- Progress and timelines regarding legalisation on mining‚ expropriations and new land reform processes‚ as well as any further reforms proposed to BEE and quota systems to advance historic redress.

- Higher education funding should take up a serious chunk of the speech and we expect some further ‘give-aways’ on fees‚ possibly extending the freeze for more years though we think government is unlikely to propose any zero-fee policy at this time. Reform of the student finance body to create a PPP (public private partnership) with private money to fund it and run it may be announced and would be welcome.

- We think privatisations will not be mentioned but reform of parastatal management to bring in private sector talent could well be. However‚ we are sceptical on this point given the politicisation of boards.

- Very long-term infrastructure spending on water may be a focus.

- The President may well shift into ‘sales mode’ on NHI given VAT hikes to come possibly in the budget‚ which is only really politically acceptable against NHI.

Overall‚ it is difficult for markets to interpret the SONA given its complex and wide-reaching content‚ contrasting themes and timing‚ after market hours. Watch through a ratings and growth lens – that is how the ratings agencies will be analysing it.

 

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