Opening Pandora's box

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 breaking.

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 one). 

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. 

 - Fin24 

*Peter Attard Montalto is an emerging markets economist at Nomura. Opinions expressed are his own.