Boosting South African growth and overhauling bloated power firm Eskom are post-election priorities for the African National Congress, but a reduced majority may force President Cyril Ramaphosa to compromise on those and other economic reforms.
Ramaphosa took office in February 2018 with a pledge to revive a sclerotic economy and attract foreign investors.
But as he prepares for his first full five-year term after the ANC last week saw its share of the national election vote fall below 60% for the first time, the country’s structural problems remain acute.
The rand hit a more than two-week high on Friday when the ANC’s parliamentary majority became unassailable, but on Monday the currency retreated and government bond yields rose as outside factors – notably the impact on emerging markets of the U.S.-China trade war – gave investors pause.
“It now all hinges on (Ramaphosa) quickly presenting a political agenda and initiating the urgently required reforms once he has formed a government,” Commerzbank analysts Ulrich Leuchtmann and Elisabeth Andreae wrote in a note on Monday.
“…The country’s problems are complex and the new government is facing a Herculean task.”
As well as speeding up reforms of Eskom and other state-owned entities, Ramaphosa’s long to-do list following his inauguration on May 25 will include generating jobs, acting against entrenched corruption in and outside the ANC and resolving policy uncertainty in the mining sector.
On Sunday, he promised a new approach.
“We are going to do things differently, we are going to do things effectively. We are going to make sure we inject growth … we are going to invite investors,” he told ANC supporters at a celebration rally.
But facing party rivals who oppose his reforms, Ramaphosa has struggled to do exactly that since he succeeded scandal-plagued Jacob Zuma last year.
An early barometer of his ability to push through change more efficiently this time will be whether he manages to trim a cabinet comprising more than 30 ministers and deputies, analysts said.
His sympathisers in the ANC are hopeful.
“The cabinet is bloated, and that is not correct when we live in the harshest conditions in the economy. We will cut down the size of the cabinet, that will definitely happen,” Fikile Mbalula, a member of the ANC executive, said on Friday.
The economy grew an estimated 0.8 percent in 2018 after recovering from recession. Growth is forecast at 1.5 percent this year, and one factor in hitting that target will be how the government manages Eskom’s restructuring.
The utility faces generation capacity constraints and South Africa has been plagued by power cuts in the past year, undermining broader efforts to kick-start growth.
Also battling to preserve Pretoria’s last investment-grade credit rating, Ramaphosa has pledged to restructure Eskom with a 23 billion rand ($1.62 billion) a year bailout over the next three years.
“Reforming Eskom will definitely gain momentum. That is something which government is serious about,” Enoch Godongwana, head of the ANC’s economic transformation sub-committee, said on Friday.
Eskom is one of the firms caught up in what has been termed “state capture” – widespread corruption involving billions of rand in government contracts.
Standard Chartered chief Africa economist Razia Khan said holding accountable those implicated in state graft was one of the most pressing issues for Ramaphosa.
“Although not an economic policy issue, action on state capture might provide the much-needed lift to investor and consumer confidence,” she said.
Foreign investor interest in South Africa has waned since Ramaphosa took office, with non-domestic ownership of government bonds dipping to 39% at end-April 2019 from a peak of nearly 43% in March 2018.
Godongwana said the ANC was putting “confidence-building measures” in place, but warned against setting expectations too high.
“Economic growth is not something that you can declare. There are lots of puzzles. There is the global aspect which you don’t have control over and investment decisions by third parties,” he said.
But as well as luring back foreign investors, Ramaphosa will also need to strike a balance between stimulating the economy and quelling simmering discontent, notably via land reform, among the black majority over lingering wealth disparities.
The latter has arguably become more acute with the strong election showing of the far-left EFF party, which champions the rights of landless blacks. It won 44 seats and saw its share of the vote rise to 10.8%.
“High inequality and the rise of the EFF could prepare the ground for more populist economic policies,” said ratings agency Fitch said.
It acknowledged tensions between the government objectives of addressing inequality and accelerating GDP, but said it expected no significant negative impact from this on growth or budget metrics.
Sergey Dergachev, a senior portfolio manager at Germany-based Union Investment, meanwhile remains “underweight” South Africa.
“The underlying structural problems are still tough to tackle,” he said. “…Even with a new mandate, it’ll be very difficult to get South Africa back on a growth trend again.”
($1 = 14.2095 rand)
(Additional reporting by Alexander Winning in Johannesburg; Tom Arnold in London; editing by John Stonestreet)