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The economic context in which President Ramaposa delivers SONA 2023 is more challenging than in 2022. The starting point in 2022 had been a normalisation in economic activity as Covid-19 restrictions had been lifted. There has been a material deterioration in 2023 growth prospects as the economy is confronted with an electricity and logistic crisis and a rapid deterioration in water infrastructure.
The economy is unlikely to sustain job creation, which increased by 1.2m during the first nine months of 2022. Business and consumer confidence has receded to pre-Covid 19 levels. 2023 is also a pre-election year with high stakes for the ruling party.
A social compact and President Ramaphosa’s leadership style
President Ramaphosa's consultative and consensus-building leadership style is premised on a social compact. The President’s 100 days to a comprehensive social compact, embedded in the Economic Recovery and Reconstruction Plan (ERRP), has not transpired.
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". It is unlikely that a formal social compact will be concluded, but the CR leadership style will always make us aware of a social compact philosophy, whether it is formally or informally established.
The absence of a formally concluded compact does not remove/eradicate CR’s emphasis of private-public partnerships. But the following key focus is whether the implementation of economic reforms can accelerate from slow and incremental to a more dynamic implementation of policies. CR’s consolidation of power in the ANC and government after his re-election at the ANC’s conference and the failure of the impeachment process, have set him up for potentially more assertive leadership initiatives. A newly constituted cabinet will provide a good indication in which direction CR will possibly move.
There is much of speculation if there could be a cabinet reshuffle before or after SONA. Strictly speaking, it does not make much of a difference when it takes place because the president can configure government departments before a cabinet reshuffle. For example, President Ramaphosa can announce a separation of the DMRE into two departments and where Eskom could reside in future, but implementing that will be a protracted process, e.g. Labour relations and other requirements.
Progress report and key focus points
Economic reforms remain slow: The same priorities featured in SONA 2021 and 2022 will be repeated in 2023. These include (a) a massive rollout of infrastructure, (b) the rapid expansion of energy generation capacity, (c) an employment stimulus to create jobs and support livelihoods, and (d) a substantial increase in local production.
In the following section, we monitor outcomes vs SONA 2022 intentions:
Infrastructure rollout and PPPs: Progress report on infrastructure rollout and Public-private partnerships, which has declined to R5.6bn in F19/20. The key challenges have been onerous approval processes and the poor capacity of departments to estimate risk-sharing with the private sector. Lack of clarity regarding the user-pays principles affects the cost of state guarantees. What are the developments around PPPs, progress on a PPP centre of excellence and expediting the approval process for projects below R1bn?
Energy security: The power shortage of dispatchable energy by Eskom in early 2019 was estimated at 4 000MW to 6000 MW. Subsequently, the energy availability factor of coal fired power stations have declined to 46% by January 2023. This raises the power shortage to least 6 000MW. Note that three to four time more renewable energy capacity plus energy storage is required to be equal to dispatchable coal/nuclear power. We monitor progress made on the projects flagged by the President in 2022:
- Bid Windows 4: 500MW from the remaining projects has been completed. Maybe 250 MW of this capacity could reduce the amount of loadshedding experienced during the evening peak time.
- Bid Windows 5 of 2,600MW: 420MW has been signed up and the projects will become operational in December 2024. More projects are expected to be signed up by June 2023.
- Bid Window 6: The programme was increased from 2,600 MW to 4,200 MW. Preferred bidders of only 860MW have been announced as all of the wind power projects could not be connected to the grid, because the commercial and industrial projects had taken up grid space during the bidding process
- 3,000MW of gas power and 513 MW of battery storage: Proposals for gas will only be released in November 2023 and battery storage at end of March 2023.
- 4,000MW from embedded generation projects in the mining sector: The projects are at various stages of being signed up and starting construction and are expected to be operational by end of 2024.
- An additional 1500 MW including battery storage could be expected to be built as embedded generation capacity at households and businesses during the next 2 years to mitigate the effect of loadshedding and would reduce loadshedding by 1 to 2 stages
Emergency power programme of 1,816MW: only 150MW has been signed and is under construction.
- Investec for Corporates and Institutions estimates that all the projects signed and under construction could contribute 1000MW of the 4,000 to 6,000MW dispatchable power shortfall.
- Depending on the timing of completing three units Kusile of 2 100MW and Koeberg’s steam generator replacement programme, which can add 940MW when coming back online by mid-2024. Medupi unit 4 should also be operational again by August 2024 and add another 700 MW to the grid. By end of 2024. The returning of these power generation capacities are not illuminating the need of the ESKOM identified 4000 to 6000 MW, since this capacity shortage was identified before the failure of Medupi and Kusile units as discussed.
Eskom unbundling: Progress in the unbundling of Eskom into three units, viz generation, transmission, and distribution, is a critical sign for opening the electricity system to the private sector. This could also be an important precursor to Eskom’s debt restructuring plan, expected to be revealed in the Budget Review 2023 to be presented to Parliament on Wednesday 22 February.
The possibility of a state of disaster: Widespread speculation about the implementation of a state of disaster is ongoing. Uncertainty exists about its legality in this particularly because it is a natural or a health disaster. Because of this uncertainty, government initiatives will not necessarily depend on whether such a state of disaster exists or not. The public in general is very cynical about it as a result of their experiences of the state of disaster for the Covid-19 pandemic.
Promoting industrial growth through localisation: Load shedding has increased the cost of doing business in South Africa as acquiring generators, inverters, and diesel consumption is raising overheads. Many SME’s are challenged by cost outlays for alternative power sources. Supply chains are impacted and are becoming unreliable in many instances. What form will an energy relief package for small businesses consist of?
Listen to the podcast
Eskom: can the SA economy avoid a meltdown?
Investec's Power & Infrastructure team and the Chief Economist of the Minerals Council Henk Langenhoven discuss the impact of loadshedding on the mining sector and the wider economy.
New 2022 initiatives – Lacking momentum
Immigration: Little progress has been made on the work visa system to speed up start-up and a remote working visas for critical skills. There have been capacity challenges at the Department of Home Affairs, and the process towards centralisation has created backlogs.
Cutting red tape for small businesses: What changes have been made to the regulatory environment and obstacles to job creation? The President appointed a unit in the Presidency to improve the business environment for companies of all sizes.
State capacity: Lack of skills and capacity constraints continue to be a major headwind in the public service and municipalities.
Other pertinent issues
State-owned enterprises (SOEs): State-owned enterprises remain a drain on the fiscus and economic activity. In 2022, the President flagged 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.
Transnet: Although third party access to the freight rail network has been initiated, with only one successful application bid.
BIG income grant: The Social Distress Relief of Grant was extended for a third year in F23/24 and is anticipated to become permanent in some shape or form in 2024.
Just Energy Transition (JET): Mr Minele, who headed up the Presidential climate finance team, has resigned from his post. This leaves several unanswered questions about the government’s capacity and direction in this respect. respect. Since 2022, CR used international forums such as COP27, the G20 and the G7 to present SA’s case for international support for JET. At the same time, he uses it as a diplomatic initiative to promote SA’s international status as a leader of the African continent and developing world.
Ticking the boxes
- Raising the licensing threshold to 100MW and then removing altogether.
- Data spectrum has been auctioned after a 10 year delay.
The fact that the ANC had concluded its national conference in December 2022, which was at the same time policy making conference, as well as its statement from 8 January and its latest NEC lekgotla, all announcements on future policy directions, therefore it is unlikely that CR will announce any new surprises. However, it is conceivable that he can reiterate some of the statements, such as broadening the mandate of the Reserve Bank to include job creation and a state bank and the seperation of the Post Bank and Post Office
Next on the agenda
The Minister of Finance will table the February 2022 Budget Review on Thursday 23 February. More details will be provided on Eskom’s debt restructuring, with the credibility of the spending forecast lacking because of the absence of the F23/24 salary increase, which will be negotiated in 2Q 23. National Treasury's macro-economic forecast will be revised, and the path of fiscal consolidation over the medium term will be closely monitored.