President Ramaphosa's sixth State of the Nation Address (SONA) was delivered in the context of the economy entering a normalisation phase. This comes after the ravaging effects of four Covid-19 waves on lives, livelihoods and the economy. But normalisation also means a return to a modest growth rate, associated with an economy that continues to lack the firepower needed to escape a low-growth trap. The requirement is firm pronouncements that can revive confidence. High on our watch list has been the prospect of bolder policy pronouncements that could turn 2022 into a year of action.
However, the pace of economic reforms remains slow and incremental. This is embodied in President Ramaphosa's consultative and consensus-building leadership style, often deemed timid, which is premised on a social compact. In 100 days, a comprehensive social compact, embedded in the Economic Recovery and Reconstruction Plan (ERRP), is expected to be announced. We are not entirely sure what this could entail, as the ERRP has been adopted as the blueprint for reviving economic growth. We conjecture that this could involve tradeoffs between labour and business, a relationship that often remains confrontational, leading to man-days and output losses. The President stated that "this should be a new consensus, which recognises that the state must create an environment in which the private sector can invest and unleash the dynamism of the economy".
Added to this are the security challenges threatening the economy, as highlighted by the expert panel's findings into causes of the July 2021 riots. The President stated that the threat to safety requires establishing multi-disciplinary units to address economic sabotage, extortion at construction sites and vandalism of infrastructure.
Priorities remain the same
Continuity is evident in repeating the same priorities in 2022 as in 2021. These are: (1) overcoming the Covid-19 pandemic, (2) a massive rollout of infrastructure, (3) a substantial increase in local production, (4) an employment stimulus to create jobs and support livelihoods, and (5) the rapid expansion of our energy generation capacity.
However, the incremental nature of the economic reform process is evident in the slow rollout of infrastructure projects. An infrastructure-led recovery is at the centre of driving the revival in economic growth. But no major announcements have been forthcoming. There are few shovel-ready projects, with development of a pipeline of projectsheld back by capacity and coordination constraints in all spheres of government. Steps moving forward include time lines for Transnet, the auction of high demand spectrum and water licenses.
- Transnet's operational capacity remains an obstacle to accelerating growth. Its vulnerabilities were highlighted by a cyber-attack suffered in August 2021. Transnet will start the process of providing third-party access to its freight rail network from April 2022. Slots will be made available on the container corridor between Durban and City Deep in Gauteng. With rail transport facing huge challenges from cable theft, Transnet has developed partnerships with the private sector to address cable theft and vandalism on the freight rail network through advanced technologies and additional security personnel. Public-private sector partnerships are being looked at for the ports at Container Terminals at Durban and Ngqura by October 2022.
- The plan to streamline the process for water use licence applications continues. The target is to clear the backlog of applications by June 2022 and process 80% of all applications within 90 days during the next financial year. A National Water Resources Infrastructure Agency is in the process of being established, with legislation to be published for public comment within the next month.
- After a long delay and court challenges, high demand spectrum is expected to be auctioned in about three weeks (although we think June is more likely).
Localisation remains a pillar of growth to revitalise the manufacturing base. In this respect, there are sectoral master plans for poultry, sugar, textiles, leather and autos, while there are also now plans for the steel industry, furniture and global business services sectors. Announcements from the Department of Trade Industry and Competition need to be monitored. The concerns are that the deindustrialisation of the economy has resulted in a loss of capacity and skills to provide local content.
Activity in the energy space is improving but load shedding to stay
The President reiterated a 4,000MW shortfall in electricity. We have noted previously that load shedding can be expected to be prevalent over the next two years until more generation capacity comes on stream. The President provided a progress report with no new developments. These include: (1) over 500 MW from the remaining projects in Bid Window 4 of the renewable energy programme; (2) 2,600 MW from Bid Window 5; (3) up to 800 MW from those risk mitigation power projects that are ready to proceed; (4) 2,600 MW from Bid Window 6, which could be opened between April and August; (5) 3,000 MW of gas power and 500 MW of battery storage, for which requests for proposals will be released later this year; (6) an estimated 4,000 MW from embedded generation projects in the mining sector; and (7) approximately 1,400 MW currently in the process of being secured by various municipalities. Eskom has established a separate transmission subsidiary and is on track to complete its unbundling by December 2022.
New initiatives: Immigration/SMEs/red tape
Immigration: There is a comprehensive overview undertaken of the work visa system. Under investigation are new visa categories that could enable economic growth, such as a start-up visa and a remote working visa.
SMEs: With SMEs having the potential to create jobs, there are two standouts. The first is announcing a new, redesigned loan guarantee scheme from DFIs and non-bank SME providers to replace the Loan Guarantee Scheme. SMEs may also be allowed to bypass certain aspects of labour legislation.
Red tape: The challenging regulatory environment has long been flagged as a significant obstacle to growth and job creation. The President announced the establishment of a unit in the Presidency to improve the business environment for companies of all sizes.
State capacity: A framework is under development for the professionalisation of the public service. This is critical if the economy's performance is to be enhanced over the long term.
A 12-month extension of the social relief of distress grant (SRD)
The SRD of R350 per month will be extended for 12 months to end March 2023. We estimate the cost to be R45bn p.a. The coming year will also see more discussions to replace the grant with permanent income support.
Zondo commission recommendations
A plan of action is to be delivered by 30 June.
The President reiterated that government will adopt a centralised shareholder model for its key commercial state-owned companies. The Presidential SOE Council is preparing recommendations on state-owned entities to be retained, consolidated, or disposed of but no timeline has been set. This remains a crucial area of uncertainty for the fiscus and the government's contingent liabilities.
Next on the agenda
The Minister of Finance will table the February 2022 Budget Review on 23 February. More detail will be provided about public-private partnerships where the regulatory framework is under review, as well as a decision about e-tolls and the extension of the Social Relief of Distress grant (estimated at R45bn). National Treasury's macro-economic forecast will also be revised and the medium-term growth forecast will be of interest in the context of the incremental progress to the economic reforms.