Sanisha Packirisamy, Economist at Momentum Investments

 

 

Momentum Investments released their report based on “SONA: Addressing Democratic Despondency with Pre-election Promises” prepared by the Momentum Macro Research Team.

 

 

Highlights

 

• While the rand and local bonds reacted only mildly to the State of the Nation Address (SONA), financial markets are expected to interpret the policy announcements as being generally positive, despite some criticism that the speech resembled an election manifesto. In particular, the announced Exploration Fund for emerging miners, a Climate Change Response Fund and investment models for the private sector to participate in establishing

 

• 14 000 kms of transmission network in the energy sector are likely to be welcomed by markets. Moreover, noting that the implementation of the National Health Insurance (NHI) will be incremental could calm market fears over a premature rollout when financing and capacity are currently lacking.

 

• The effectiveness of these announced interventions to tackle the challenges the country is facing is significantly dependent on government’s willingness to execute these plans and the availability of fiscal resources.

 

• Aligned with the January 8 statement, the president allocated a substantial portion of the SONA to highlight the achievements attained by the ruling party since the advent of democracy, but he also switched focus to the recent governmental successes since the pandemic.

 

• South Africa’s (SA) freedom of the press, electoral integrity, independence of institutions and separation of powers have allowed the country to continue to perform relatively well on global indices measuring democratic quality and political rights. However, citizens are voicing their discontent with democratic governance in the country due to significant challenges such as unemployment, crime, electricity shortages and water scarcity.

 

• The SONA outlined the steps that the government has already undertaken to close the energy capacity gap, including regulatory changes, restoring units of Eskom’s fleet to operation and encouraging investment by the private sector. In our view, accelerating the delivery of transmission infrastructure is critical to ensuring energy security further out. The announcement that innovative funding models would be used to crowd in the private sector is seen as positive in this regard.

 

• The speech also emphasised the importance of attracting private sector participation in the network industries without relinquishing state ownership. In addition to the Cabinet approving the Freight Logistics Roadmap last year, we believe that the passing of the Regulation of Transport Bill is critical to improving operational performance. In our view, increasing efficiencies in the area of logistics remain a function of the vertical separation of Transnet and the introduction of third-party access across the railway network.

 

• The SONA further highlighted the shortcomings of our law enforcement agencies which have led to a rising level of lawlessness in the country. Consequently, government has set up a crime and corruption workstream, partnering with the private sector to jointly combat crime and corruption. In our view, further capacitating the National Prosecuting Authority (NPA) and the Independent Directorate (ID) are important steps to concrete prosecutorial gains.

 

• In the way of legislative updates, the SONA reiterated the importance of implementing the NHI despite having yet to spell out details on how it will be financed. The National Council of Provinces passed the NHI Bill in December last year and it is currently awaiting sign-off by the president. Improving access to health care will likely remain a key tenet of the ruling party’s election campaign, but political analysts are speculating that the president will defer the signing of the Bill until after the election. He still holds the option of sending the Bill back to Parliament to ensure that it passes constitutional muster.

 

• In addressing the country’s social ills, the speech spoke about building onto the District Development Model to enhance the delivery of social services in poorly resourced municipalities. Moreover, government noted the importance of extending the Social Relief of Distress (SRD) grant to provide for basic incomes.

 

• To mitigate policy uncertainty and expedite the implementation of structural reforms with far-reaching benefits, there is a need for a broader political consensus regarding the measures necessary to address SA’s sluggish growth rate and employment prospects. From our perspective, cultivating positive consumer, business and investor sentiment demands a collaborative effort to synchronise interests among government, business, labour and civil society. The SONA underscored that as a nation, we have yet to achieve this alignment.

 

• The objective remains to establish a social compact to drive collaborative initiatives in pivotal areas essential for economic advancement, in the context of a strained fiscal environment. As it’s an election year, there’s increased scrutiny on government’s approach to fiscal consolidation, with concerns arising over the potential for a more populist approach given the current stage of the electoral cycle.

 

Download the full report below…

 

 

ENDS