Ramaphosa’s ‘oh hell’ moment

In my first week as a journalist, many moons ago, I learned that the best stories are those that elicit an “oh hell” response from the reader.

These are the stories that catch the reader off guard, compelling them to share instantly with friends and connections via social media.

I bet President Cyril Ramaphosa said “oh hell” when he saw the Stats SA GDP memo last week. (He may even have agitatedly phoned statistician-general Risenga Maluleke to check whether there was a typo or not.)

The restated -2.6% GDP growth rate in the first quarter and 0.7% retreat in the second should have come as a shock. This follows some pretty rosy predictions of accelerated growth following Ramaphosa’s election as president.

The president knows that the real impact of the GDP number will be exposed next month when finance minister Nhlanhla Nene announces the medium-term budget policy statement or mini-budget.

He will reveal that South Africa’s fiscal position has deteriorated sharply since February this year due to the weaker GDP and the resultant decline in tax revenue – something he alluded to on Monday at the Tax Indaba.

Nene will most likely reveal that government debt now exceeds 55% of GDP and that the budget deficit will spike to about 5%, a lot more than the 3.5% his predecessor Malusi Gigaba announced during the budget in February. And this significant weakening of the fiscal position and depressed economic growth during the first half of the year may leave the very patient Moody’s with little option but to follow in the footsteps of S&P and Fitch and cut South Africa’s credit rating to sub-investment grade.

I am also sure Ramaphosa will appreciate that the current precarious economic reality is irrefutably self-inflicted. South Africa’s historic economic performance was always closely correlated with global economic growth, but in recent years this correlation has regressed.

This divergence in economic performance is also set to increase. The World Bank expects emerging markets to grow by 4.9% this year, while the world economy is set to expand by 3.1%, led by the US and China. South Africa will be lucky if it shows any growth at all.

What now?

Ramaphosa will also appreciate that the status quo cannot continue and that the fall into recession needs to trigger some response. This will require some unpopular decisions very few politicians would be prepared to take a few months before an election – including a significant cut to the public wage bill and the removal of policy uncertainty, especially around the controversial proposal to change Section 25 of the Constitution to allow for expropriation without compensation (EWC).

I appreciate that Ramaphosa is in a precarious position and that any unpopular decision to stimulate the economy could lead to the ANC losing next year’s election.

I am therefore not holding my breath for any announcement related to cutting the public wage bill, the privatising at least parts of Eskom and the SAA, or the relaxation of labour legislation.

A good start would be to rebuild trust between government and the private sector, and more importantly, to acknowledge that the latter, a critical stakeholder in our economy, is committed to a prosperous South Africa. There needs to be an appreciation that the current lack of investment by local and foreign investors is due not to anti-patriotism, but the predictable outcome of a weak economic environment created by the state.

There needs to be an appreciation that not all politicians are Jacob Zumas and not all private sector corporations are Steinhoffs. There is a middle way, and Ramaphosa needs to steer the country down it.

His first agenda item should be to remove uncertainty flowing from the aggressive land reform proposals. He needs to appreciate that the problem can be solved much more quickly by improving administrative efficiencies in the land reform process and that South Africa cannot afford the massive economic opportunity cost of this policy.

The goal must be swift and efficient land reform. The journey cannot be more important than the destination.

History speaks for itself. The transfer of land fell from a high of 500 000 hectares in 2007/08 under Thabo Mbeki to only 150 000 hectares in 2015/16 and virtually nothing in 2016/17. In 2008/09 the land reform budget was 0.45% of the national budget, which also dwindled to only 0.2% in 2015/16.

This clearly suggests that EWC is nothing more than a populist policy battle between the ANC and the EFF.

In fact, government regards the personal safety of its leaders as more important than land reform.

Yes, read that statement again.

The table below shows the budgeted amounts for land reform and VIP protection. South Africa is destined to pay R2.9 billion to protect VIPs – R218 million more than the government will spend on land reform.

This is a bizarre revelation. But there are many other examples that prove the ANC is willing to throw a lot of money at problems.

Last week government ‘found’ R500 million to cap a fuel price hike in September. This R500 million is 18% of the 2018 land reform budget. Another is Eskom’s 7%+ wage settlement with trade unions after the utility started negotiations with a 0% offer. National Treasury intervened and settled the negotiation even though it would add R1 billion to a virtually bankrupt Eskom’s expense line – nearly 40% of the land reform budget.

Add to this the seemingly bottomless pit of bailout funds available to SAA, SABC, Eskom, Denel … I think you get the picture.

To follow the same approach with land reform would be much more effective than changing the Constitution. Follow the Namibian model, and give government a pre-emptive right to buy any property at the same price at which a commercial property transaction would be concluded. Or just budget more money to buy property on the open market after valuations by independent valuers. Use existing expropriation policies if some property owners try to exploit the system. Such an approach will be more effective.

These solutions may not be politically attractive in the current ANC/EFF tango, but the economic fallout will be much less severe. This may be a pipe dream, but hopefully, last week’s “oh hell” GDP number will alert Ramaphosa and his cabinet to the fact that their current thinking needs some adjustment.

Source: moneyweb.co.za