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Lack of short-term fixes for Eskom - expert

Feb 11 2015 21:31

Cape Town - South Africans shouldn’t hold their breath hoping that President Jacob Zuma will announce a short-term solution or strategy to alleviating the country’s electricity problems in his State of the Nation address, according to Izak Odendaal, investment strategist at Old Mutual Wealth.

Odendaal said, while comments on the energy crisis will attract much of the spotlight, there are, unfortunately, very few viable short-term fixes to the problem. Any solutions offered by government would only be able to address the issue over the medium to long-term.

“The good news is that the economy has become less energy-intensive over time. This is evidence of a flexible economy responding to higher electricity tariffs and constrained supply," said Odendaal.

According to Stats SA, electricity production peaked in early 2008, fell during the recession and rebounded in 2010.

“Since 2011, electricity output has continued declining and is now at 2006 levels. But, real gross domestic product (GDP) has grown by 20% over this entire period of falling electricity supply," he said.

"Of course, real GDP would have grown even more if electricity supply was reliable, but the point remains: the economy has not come to a standstill."

This is, therefore, not a "make or break" speech for the economy, which is generally resilient and adaptable enough to deal with crises, in his view.

READ: Govt won't let go of Eskom, other SOEs - expert

Freeing up local economy

Odendaal said beyond the constraints of electricity supply and other infrastructure shortcomings, another issue which investors will be looking to the president to address was ways to free up the local economy, which continues to be hamstrung by too much red tape.

“Many of the growth-enhancing reforms outlined in the National Development Plan (NDP) are opposed from within the ruling alliance,” he said.

“A few weeks ago, the governor of the SA Reserve Bank (Sarb) again said that structural reforms are needed to get the economy going as lower interest rates alone won’t do the trick. Announcements on this front would be welcome, but are not expected."

READ: Load shedding forces SA to cut reliance on Eskom

Implementation vs intentions

Odendaal said the problem with State of the Nation speeches has always been with implementation, not intentions.

“The looming local government election in 2016 certainly increases the pressure on government to deliver, but it is unclear where improvement will come from. The issues that bedevil the public sector, particularly at local government level – low productivity, inadequate management skills, corruption, political factionalism and poor oversight – are not going to disappear overnight,” he said.

Investors will have to read between the lines of Thursday’s speech for cues to what the budget speech might hold, according to Odendaal. The key pointers will relate to how much government might borrow, which will have an impact on the bond market, and South Africa’s sovereign credit rating.

“Although the State of the Nation address is less important than the budget speech, it presents the broad policy framework within which the budget allocations will be done. From the mini budget presented last year, we got a clear message that tax increases are likely.

“The tone of Thursday’s address, as well as the changes expected in the budget speech in two weeks’ time, should put SA in a healthier fiscal position. A reduced deficit and positive signals from government will provide an improved economic position, which will go some way to increase investment sentiment," said Odendaal.

"And it could take pressure off Sarb to raise interest rates and create a more positive response on the part of ratings agencies.”

Odendaal said the State of the Nation address is perceived to be more about pageantry and politics, whereas the budget speech is clearly more about how government intends putting its money where its mouth is.

“Unless there is a major new and concrete policy announcement, financial markets are unlikely to react too much to the State of the Nation address," he said.

"However, the tone of the address could go some way to boosting confidence in the country, especially if the president is honest about the challenges facing the country and presents a credible set of solutions.”

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