Guest columnist Peter Attard Montalto of Nomura gives his
assessment of President Jacob Zuma's state of the nation address:
President Jacob Zuma’s state of the nation address seems to
be the usual combination of a review of successes and a further push forwards
on spending commitments and developmental state provisions. The speech takes
aim at the successes of the presidential infrastructure commission, though
arguably faster progress is needed on this front to move projects to ground
New promises on additional projects are also very welcome,
particularly around the railways.
The admission that growth really needs to be about 5% is
very true but, in our opinion, it seems the speech only presents a programme
that allows South Africa to remain at the current lower potential growth rate
of around 3.7%.
The National Development Plan (NDP) was mentioned
surprisingly little so far and there seems to have been little explicit detail
on what of the NDP will be implemented in any granular way.
The NDP seems to be dangled in front of us as positive
anchor to government policy but the way actual policy and actual implementation
is linked with the plan seems to be very vague beyond"‘NDP says focus on
something, so we are", to put it crudely.
However, there are a number of very interesting specifics in
the speech. Specifically, a tax commission to assess how the state can garner
the resources to boost spending seems to hint that a step change in spending is
about to occur. However, it seems a greater tax burden may well be delayed
until after the election next year.
Such an increase in spending, however, in our view, would risk
deficit financing and, hence, reinforce the deficit and debt risks. It is also
all but confirmed that a mining tax will be part of the study of this
commission, and a policy on that front should indeed be formed this year. The
speech also highlights that the national health insurance (NHI) funding wrapper
will be put in place from next year, again probably after the election.
There were no real explicit additional spending commitments
in the address. The R3bn for jobs that was mentioned is already included in the
jobs fund. It seems the upcoming budget has little room to manoeuvre on revenue
before next year’s election, and will be somewhat constrained in terms of new
major spending commitments.
As such, the tone may well be a few small
"giveaway" spending commitments that are debt and deposit-drawdown
financed, with the pace of consolidation slowing. Such a move may well raise
the ire of the ratings agencies, though it should not be enough, at this stage,
to prompt further downgrades.
Also in the address there is an admission that there will be
a review of state workers’ salaries. This probably refers more to the expected
municipal worker negotiations – prior to the election and to avoid strikes. It
may well result in larger than appropriate increases, which can then cause
contagion risk into wide public sector wage agreements (including last year’s
Some of the statement struck an uncertain chord, however,
such as that the government has “created certainty in the mining sector”. The
opposite is true with additional regulatory reform, and uncertain amendments to
the law and other regulatory reforms, not to mention the mining tax.
Equally there was the reference to a compact being signed at
Nedlac soon on labour. Given the lack of any real agreement in this forum so
far, it seems difficult to see how such an agreement can be that
ground-breaking or impactful.
As expected, land reform is being dealt with in detail and
in particular the change in language to “fair and equitable” from “willing buyer
and willing seller” is as expected. However, the reopening of the ability to
file claims on land should be watched closely.
There was no mention of the foreign land ownership issue,
unfortunately, despite that been such a key area of focus (and concern) in the
past week. We would not read into the omission as being indicative of the
policy not being backed.
Education was the one area where Zuma sounded emboldened and
ready to meaningfully stand up to Cosatu allies. It was probably the only area
where he spoke with any real passion, saying that education must be defined as
an essential service and that that would not mean that the rights of teachers
would be affected.
Zuma seemed ready to push forward with the markation
process. However, this seems still a legally dubious route to take, given that
for an essential service workers cannot strike under the normal rules. It seems
Zuma would like to have his cake and eat it.
Equally, the focus on education seems odd with the same
leadership in place who presided over the (seemingly never-ending) Limpopo text
book scandal. Additionally, the National Planning Commission has already been
trying to push education as one of its first NDP implementation goals but has
experienced strong push back at both a departmental and local government level.
Accordingly, this is making progress impossible in all save
some pilot "experiment" areas, and even then mainly when it involves
the charity sector rather than the state. This gives an unfortunate insight
into the implementation hurdles ahead.
An extended discussion on corruption was of course very
welcome but we remain sceptical on this front. It is the "legitimate"
forms of networks of political and business influence in the shade of the
economy that run through the ANC with its tenderpreneurs that impact foreign
direct investment investors.
This is in addition to low-level corruption that affects
individuals on the street (traffic cops being something we highlighted in
November after our trip) and are more of a structural concern to us than the
forms of corruption Zuma highlighted in the state of the nation address with construction.
*Peter Attard Montalto is an emerging markets economist at
Nomura. Opinions expressed are his own.