08 MAY 2019
The fake resurrection of South Africa
by UCT GSB Associate Professor Sean Gossel
While hopes are being pinned on the 8 May election to provide the ailing South African economy with new direction and growth, all indications are that this faith may be unfounded.
When Cyril Ramaphosa took over the presidency of the country just over a year ago, few wanted to think that South Africa’s ‘new dawn’ would turn out to be yet another fake resurrection; but unfortunately, this increasingly appears to be the case.
South Africa’s declining fiscal and economic space can be traced back to the global economic crisis of 2008, and the Zuma presidency which gained traction at around that time. Under Zuma, the country experienced the erosion of democracy and declining economic fortunes, and a rise of authoritarian leanings and patronage-driven elitism. It will take a herculean effort and many years to recover from his disastrous nine-year presidency during which billions, if not trillions of rand, were siphoned from parastatals through corrupt activity in what has become known as the state capture project.
Finance Minister Tito Mboweni’s budget speech, delivered in Parliament in February, confirmed yet again that the country is in deep trouble, and sadly it looks like the situation will only get worse as the last embers of “Ramaphoria” fizzle out.
The budget painted a bleak picture: Rising expenditure (largely driven by the public sector wage bill); declining tax revenues (pointing to low economic growth and systemic problems at SARS, the receiver of revenue); increasing debt (SA’s debt to GDP ratio will peak at just over 60% in 2023/2024); low growth projections (the growth forecast for 2019 was revised downwards from 1.7% to 1.5%); and failing state-owned enterprises. Most significantly, Eskom the troubled power utility, has a debt burden of more than R400bn, which it is unable to service from its revenue and is thus regarded by ratings agencies as a major risk to South Africa’s finances. In Mboweni’s budget, provision was made for financial support of R69bn to the cash-strapped utility over three years. Support will total about R150bn over the next 10 years as part of a rescue plan, but it won’t be enough.
The power utility is struggling largely as a result of corruption, poor management, and design flaws at its costly new mega power plants Medupi and Kusile. Eskom has also struggled with maintenance issues at most of its aging power plants. This has once again raised the spectre of ongoing load-shedding, which will certainly hurt the country’s ability to revive its moribund economy. As Simi Siwisa, an executive director at research and advisory ?rm, Stratvest, put it during a recent post-budget commentary at the UCT Graduate School of Business: “Who will invest in South Africa without security of energy supply? Eskom cannot guarantee that [energy supply]. The budget was meant to be the medicine to resuscitate the economy, but that did not happen. It did not lay the foundation for growth.”
Instead, Minister Mboweni has placed the economy in a holding pattern, waiting for the election before making any major decisions.
Moody’s, which maintains the country’s sovereign rating at one notch above junk status, may yet decide to downgrade later this year. A downgrade would mean all three major ratings agencies have SA’s foreign currency and rand-denominated debt at sub-investment grade, consequently triggering the country’s exclusion from the Citi World Government Bond Index and projected capital outflows of hundreds of billions of Rands.
State-owned enterprises were supposed to be the backbone of the developmental state, but in South Africa they have spectacularly failed to deliver on their developmental mandate. What the budget really shows is that South Africa is living with the after-effects of a failed developmental state. Thus, for the country to progress, it will be imperative to reconsider the role of state-owned entities in the country’s developmental agenda. Indications are that there will be little option but to move away from a developmental state ideology; and instead restructure, privatise, and list parastatals so as to ensure that the country is fiscally sustainable.
The country has high hopes that the election will lead to renewed direction and an economic boom but indications are that we are likely to see yet another fake resurrection. This election is gearing up to be the most hotly contested in the country’s democratic history, and polling results thus far suggest that, after the election, the country will be entering an unprecedented age of coalitions. And with such vastly different political ideologies and ambitions in play, there is a high likelihood that these coalitions will be even more unstable than those the country has experienced since the local government elections in 2016. In addition, there is also the danger that corruption will become decentralised as it will be a useful tool to attract, control or maintain unstable coalitions. Consequently, the strength of the country’s democratic project, which has already been significantly eroded during the Zuma years, could be further damaged post 8 May.
The hope therefore that the country is pinning on these elections – just as the hope that was pinned on a pro-growth budget before them – is likely to be unfounded. Instead, they will probably deliver yet another fake resurrection.
Gossel is an associate professor in economics at the UCT Graduate School of Business and lectures Public Sector Finance on the MCom (Development Finance) programme, Capital Flows and Emerging Markets on the MBA programme, and Macroeconomics on the EMBA. His research focusses on the effects of financial globalization on democracy in Africa.
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