State of the Nation Address government s agenda for 2017 Elevated policy uncertainty has increased market awareness around the State of the Nation Address (SONA) an annual report on the state of the country s affairs, progress on government s priorities and an outline of government s agenda for the coming year. The speech commenced more than an hour later than scheduled, in another chaotic scene inside and outside of National Assembly, in which members of Parliament from the main opposition parties were either escorted or thrown out. Opposition parties questioned the right of the President to deliver the address on the grounds that he had violated the Constitution with regards to the Nkandlagate controversy. This year s State of the Nation Address (SONA) was once again set against a tough economic backdrop, following a bruising election for the ruling party in August 2016, in which a large number of voters stayed away from the polls in frustration with the current administration. A low growth trajectory continues to pose a risk to the path of fiscal consolidation, raging unemployment and elevated inequality, leaving SA exposed to the risk of a potential sovereign ratings downgrade. Though assuming the theme of radical socio-economic transformation, the following urgent tasks were re-emphasised under guidance from the National Development Plan: Industrialisation Mining and beneficiation Revitalising the agriculture/agro-processing value chain Energy Small business development Managing workplace conflict Attracting investments Growing the ocean s economy (forming part of Operation Phakisa) Prioritising tourism The President also highlighted that science and technology, infrastructure (water, sanitation and transport) and broadband rollout had been focussed on in the past year. In an effort to achieve radical socio-economic transformation, legislation, regulations, licensing, budget and procurement as well as broad-based black economic empowerment charters are expected to influence the behaviour of the private sector and drive transformation.
Government has already gazetted regulations in January, stipulating that 30% of business conducted by big contractors must be sub-contracted to black-owned enterprises. In Momentum Investments view, some of the interventions declared in driving radical socio-economic transformation, including a radical land reform programme, direct state intervention in mining, procurement processes and more regulatory red tape, could further dissuade investment by the private sector and stifle employment growth. The announcements made in the SONA are unlikely to affect SA s low growth trajectory in the company s view. Momentum Investments real GDP growth forecasts remain intact at 1.2% for 2017 and 2.0% for 2018. Further out, a lack of meaningful reform to improve SA s investment climate or tackle problems in SA s struggling state-owned enterprises is likely to cap trend growth to around 2%. Notable points of discussion included the following: Enhancing interaction between government, business and labour The President suggested that the increased interaction between key stakeholders in the economy had enabled the country to address domestic challenges and, in so doing, avoided a credit ratings downgrade. In Momentum Investments view, while the risk of a ratings downgrade could once again be averted in June 2017, thanks to the announcement of much-needed labour reforms and improved domestic growth prospects (due to higher global growth expectations, a reversal of last year s drought effect and a near 20% recovery in commodity prices since this time last year), a downgrade in December 2017 cannot be ruled out. SA remains stuck in a low growth environment marred by ongoing policy uncertainty. Little mention of strategies to reform SA s ailing state-owned enterprises in the SONA is likely to be a concern to the rating agencies. A failure to accelerate SA s trend growth prospects suggests, to us, a higher-than-even chance of a sovereign downgrade by at least one of the rating agencies by year end. Finalising labour sector reforms In October 2016, a panel of experts appointed by Deputy President Cyril Ramaphosa provided advice on the formulation of a national minimum wage (NMW). The NMW report was released by a committee of principals in November 2016, endorsing a R20/hour wage level (R3 500 level for full-time employees), which is to be gradually implemented by (a revised) May 2018 deadline. While the National Economic Development and Labour Council (NEDLAC) finalised its debate on the proposed level, labour union Cosatu was not present at the signing of the deal, instead requesting a postponement until month end based on a disagreement with the number of working hours and the annual adjustment in the minimum wage level. A process to review the level of the NMW regularly had formed part of the NEDLAC discussions. The two approaches under consideration included an automatic adjustment (based on inflation, growth and productivity trends) as well as a more flexible method linking increases to the level of unemployment and overall health of the economy. Cosatu is opting for the first method to lock in wage increases. However, the NEDLAC agreement has left this to an annual review by the NMW Commission (to comprise of business, labour, community representatives as well as experts). Outside of the NMW, other measures to stabilise labour relations appear to be far advanced. Discussions around the code of good practice (involving collective bargaining, industrial action, picketing and the use of weapons during strikes) accompanied the NMW agreement. Moreover, there appears to be significant agreement on advisory arbitration a system under which the arbitrator proposes an advisory settlement, which the employer and trade unions can take back to their relative constituencies, to come to an agreement. Although broader labour market reform is seen as a positive for labour stability in SA, generating higher levels of productivity is key in ensuring future employment growth. Intervention in prolonged or violent strikes and a macro research and asset allocation state of the nation address january 2017 Page 2 of 4
more formalised approach to advisory arbitration could reduce man-days lost and curb production losses. The implementation of an NMW, while edging closer to a so-called living wage, could, however, result in further job losses, as corporates strive to protect profitability levels. SA s energy plan It was reiterated that government remains committed to the Independent Power Producers Programme (IPPP). Nuclear energy did not feature in the speech, except to reinforce that it remains a part of SA s energy mix (referring to the already-existing Koeberg power station). Eskom had previously failed to issue final budget quotes for preferred bidders in Round 4 and the extension of Round 4 of the Renewable Energy IPPP (REIPPP). Government s support for the programme is viewed as a positive for fixed investment and job creation. Given that the updated 2016 Integrated Resource Plan points to little need for nuclear energy, any further signs of this unaffordable project will be seen as negative for the budget (Eskom could need a higher level of guarantees) and for SA s credit rating. Mining Charter and the Mineral and Petroleum Resources Development Act (MPRDA) The opening address of the 2017 Mining Indaba (as well as the SONA) revealed little new information on the topic. It was reaffirmed that the MPRDA would be concluded by June 2017 and the final mining charter (outlining the transformation plans and targets for the mining sector) would be gazetted by March 2017. Government also confirmed its pursuit of direct state involvement in mining. The Mining Company of SA Bill is expected to be presented to Cabinet during the course of 2017. In Momentum Investments opinion, the SONA failed to give a clear signal that the relationship between industry and the Department of Mineral Resources is on a path of improvement. Without definitive legislation, SA is unlikely to be seen as an attractive destination for new (and foreign) investment in the mining sector. Addressing land reform and land redistribution The land redistribution programme continues to disappoint relative to the required goals. In response, the Department of Human Settlements will draft a Property Practitioners Bill to accelerate efforts of increasing black land ownership. Meanwhile, the Expropriation Bill (dealing with land reform and land distribution) has been referred back to Parliament due to inadequate public participation. More equitable land ownership could compromise agricultural investment and food security if not approached correctly. Ceilings for private agricultural land ownership and regulating ownership of agricultural land by foreigners could hamper the agricultural sector s development in Momentum Investments view. Tackling the free tertiary education debate A ministerial task team was set up in October 2016 to address the student protests for free tertiary education, which racked up nearly R1 billion in damages. Since then, the Ikusasa Student Financial Aid programme (ISFAP) has been set up to address the poor and so-called missing middle students. Funding is expected to be provided by government education and training departments, nonprofit organisations, development finance institutions, foundations, local and international donors and the private sector, individuals, retirement funds and social impact bonds (where investors can share in any of the savings generated). A pilot project, amounting to R200 million (R140 million has already been raised by the private sector) is set to run in 2017 to enable 2 000 missing middle students to study macro research and asset allocation state of the nation address january 2017 Page 3 of 4
towards a scarce skills profession. Based on the success of the pilot project, a formal implementation could transpire in 2018. The task team estimates that SA will need between R42 billion and R45 billion a year to cover the full cost of tertiary study (tuition, accommodation, books and meals, plus one extra year) for up to 65% of the students currently enrolled at universities in SA. With government providing roughly R17 billion a year in the short term, the remaining is to be sourced from the private sector. It has been proposed that the Black Economic Empowerment Act be amended to have companies voluntarily contribute 1.5% of their payrolls towards funding poor students. This alone is estimated to raise around R8 billion in additional funding this fiscal year, increasing to R15 billion by 2020. Momentum Investments views these developments as positive in addressing the key challenge of costly tertiary education in SA. However, key challenges remain in primary and secondary schooling. Poor teacher content knowledge, absenteeism and inefficient evaluation systems need to be addressed as a matter of urgency. macro research and asset allocation state of the nation address january 2017 Page 4 of 4
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