South Africa: A Refreshing Budget But Challenges Lie Ahead

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When it comes to Eskom, no new funding has been announced (the government provided ZAR56bn to Eskom in 2020/21 and ZAR32bn has been allocated for 2021/22). Around the time of last year’s budget, the government presented plans to separate Eskom into three units and allow independent power producers and there have been proposals by unions and business groups to tackle Eskom’s financial viability (ZAR464bn of debt in September 2020 or c.9% of GDP).

In the budget, the National Treasury announced that the transmission unit will become self-standing by the end of this year, with the generation and distribution units to follow a year later. On the debt side, we have seen revived momentum recently, but any meaningful progress remains elusive.

Fixing Eskom is imperative because it would not only reduce contingent liabilities (with the government providing guarantees on ZAR327bn of debt in 2019/20), but also because of insufficient electricity availability (with 52 days of power cuts in 2020, the highest since 2015). In that regard, the announcement of successful bids from Independent Power Producers (IPPs) for emergency power in the amount of 2,000MW by end-March marks an important first step (albeit it will take at least another year for the projects to provide electricity).

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Above all, however, lifting the economic growth outlook remains the key priority. The National Treasury expects GDP growth of 3.3% this year (thanks to favorable base effects) but the pandemic continues to pose near-term risks. Growth is expected to moderate to 1.6% by 2023, marred by high unemployment (hitting a record high of 32.5% in end-2020), power outages, and fragile business and consumer confidence.

President Ramaphosa presented an economic recovery plan targeting 3% average growth over the next decade with a focus on infrastructure and job creation although implementation will take time and face obstacles.

Other developments we're following on the domestic landscape:

  • We will closely look at the inflation picture and implications for the Reserve Bank (SARB). January CPI (3.2% YoY) remained at the lower bound of the SARB’s 3-6% inflation target range. However, the SARB is expecting 2021 average inflation at 4.0%, above the current repo rate of 3.5%. Amid weak growth, SARB policymaking will likely remain accommodative and the central bank might be willing to accept modestly negative real rates if inflation levels remain controlled.
  • On the political landscape, we are monitoring developments within the ANC ahead of municipal elections (sometime between August and November) which will be a test on the Ramaphosa government. The anti-graft fight has seen some high-profile charges over the last months, notably against ANC Secretary-General Ace Magashule who has however denied wrongdoing and defied calls to step down, with the next court hearing scheduled for August. The matter could result in signs of more factionalism at the ANC’s National General Council (NGC) which is likely to take place in May.

Rating agencies don’t take the bait from better budget execution

South Africa has gone through an accelerated downgrade cycle in 2020, with a total of five downgrades across the three major rating agencies. The ratings at Moody’s (Ba2) and Fitch (BB-) remain on negative outlook on doubts that the government can stabilize its debt burden amid weak growth and elevated fiscal deficits. Moreover, rating agencies are monitoring financing conditions (access, interest rates, and capital flows) given increasing borrowing needs and costs.

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