Why markets snubbed Ramaphosa’s stimulus plan

When a country introduces a fiscal stimulus package into a struggling economy, currencies and markets normally strengthen in anticipation of faster economic growth, job creation, and market-friendly policies.

However, the marginal decline of the rand and muted market reaction on Friday after President Cyril Ramaphosa revealed a stimulus package aimed at putting SA’s damaged economy back on course suggests there is scepticism about the state’s intervention.

Faced with ballooning government debt, low tax revenue collection, an economy in a recession and rampant corruption, Ramaphosa reacted with a stimulus package and economic recovery plan designed to reignite growth, stimulate economic recovery and secure confidence in sectors affected by regulatory uncertainty and inconsistency.

At the centre of the stimulus package is a R400 billion infrastructure fund aimed at attracting investment from the private sector. Government also plans to reprioritise about R50 billion within its existing budget to spend on measures that will, it is hoped, spur economic growth and create jobs. No new public money will be injected into the economy.

Ramaphosa’s plan mimics interventions by Indian Prime Minister Narendra Modi, who, in 2015, set India on a course of raising billions from long-term international investors – such as sovereign wealth funds and pension funds – to fund infrastructure projects ranging from highways and freight corridors to airports.

But unlike India, the wheels of SA’s economy are not turning and there’s simply no money to fund new, productive investments to stimulate growth.

The Reserve Bank expects SA’s economy to grow by a paltry 0.7% in 2018, while India expects to pencil in 7.4% growth. SA’s budget deficit in relation to its gross domestic product (GDP) – a key metric indicating that government expenditure exceeds revenue – is expected to be 3.6% in 2018/19 (although latest estimates are 4%), while India expects to trim its deficit to 3.3%. And although India’s debt-to-GDP ratio is projected to be 69% in 2018 – much higher than SA’s 53% – it has economic growth to cushion the debt burden.

Market reaction

Why then haven’t markets responded to Rampahosa’s stimulus package with the type of gusto displayed when India and Japan, under Prime Minister Shinzō Abe since 2013, crowded in private sector infrastructure investments running into billions to boost their economies?

There is deep scepticism about whether Ramaphosa’s cabinet has the capacity to mount any meaningful stimulus. “The true test will be how much of the stimulus package Ramaphosa will be able to implement, how quickly it can be implemented and whether we can get economic growth from it,” says Citibank economist Gina Schoeman.

Daniel Silke, director of the Political Futures Consultancy, agrees with Schoeman, saying that any implementation of a stimulus package hinges on whether the government is able to run itself. “What is the state of the bureaucracy? Are there officials within the state that are patronage-focused rather than performance-focused? How do you clean out that philosophy of patronage to make the state more effective? There are still big question marks that remain before talking about a stimulus.”

And with just a few months before the 2019 general election, and the ANC deeply divided on policy direction, there’s little chance that Ramaphosa might kick the stimulus into gear. Says Silke: “Until such time as Ramaphosa feels confident in his own shoes as the president of the country, we are going to get [a] muddled patchwork-mandate kind of story. If Ramaphosa can secure a reasonable election victory for the ANC next year, then he will be more secure. An election victory might strengthen his hand within the party.”

Actual stimulus plan

As part of the stimulus plan, government will shift R50 billion from other budgets to support emerging farmers and boost economic activity in townships and rural areas. Other initiatives are more about clearing regulatory burdens – including releasing spectrum to telecommunications operators, revising the mining charter, and easing visa regulations to make it easier for skilled people and tourists to enter SA.

There’s also the R400 billion infrastructure fund – money already allocated in the existing budget for public infrastructure between 2018/19 and 2020/21. Like India’s Modi, Ramaphosa is seeking to crowd in investments from commercial banks, development financiers (such as the Development Bank, Industrial Development Corporation and African Development Bank) and pension funds to contribute to the infrastructure fund.

Although the stimulus package lacks detail on where government will find R50 billion from an already constrained fiscus, Citibank’s Schoeman rates the plan eight out of 10. She says the re-allocation of the existing budget as opposed to introducing more debt to fund the stimulus package is a “positive move”.

Finance minister Nhlanhla Nene says National Treasury has undergone an “excruciating process of reviewing underperforming programmes” to free up R50 billion. More details will be unveiled in the medium-term budget policy statement on October 24.

Tanya Cohen, CEO of Business Unity South Africa, says business doesn’t expect the stimulus package to be a panacea for SA’s economic shortfalls. “However, the stimulus package demonstrates the government’s appetite to do things differently to rectify the economy’s structural defects,” she says.