South Africa: The economics of #SONA2017

South African President Jacob Zuma

President Jacob Zuma delivered his State of the Nation (SONA) 2017 address on the evening of February 9th. While optimistic about economic growth reaching 1.3% this year from 0.5% in 2016, he acknowledged that the South African economy “is still not growing fast enough” to create the jobs needed to reduce poverty, inequality and unemployment.

Based on a word frequency analysis, SONA 2017 was much more focused on economic transformation and the racial inequalities still prevalent in the economy than the 2016 address. This is linked to many references in the speech about former ANC President Oliver Tambo, and Tambo’s views that political transformation also requires socio-economic emancipation.

Minimum wages

President Zuma linked cooperation between government, business and labour with the sovereign (so far) avoiding a ratings downgrade to non-investment grade. He also pointed to this cooperation bringing more stability to the labour market (i.e. fewer strikes) as well as enabling the reaching of an agreement between government and trade unions on minimum wages in the days leading up to SONA 2017.

It is interesting to note that the R3,500/month minimum wage translates into annual income of R42,000. That figure is the current maximum income ceiling for parents to qualify for child support grants. This seemingly suggests that, if the minimum wage was implemented today, many employed workers subject to the R3,500/month minimum wage would no longer qualify to receive child support grants. There is currently no clarity from the government’s side on this issue.

Foreign investment

The president referred to the recent launch of InvestSA, an investment-focussed one-stop shop aimed at making it easier to do business in the country by reducing “undue delays” and “unnecessary red tape”. South Africa was ranked 74th (out of 189 countries) in the recently-released World Bank Doing Business 2017 report, falling from a much stronger 40th position in the 2014 report.

South Africa recently experienced a decline in foreign direct investment (FDI) inflows. Comments in SONA 2017 aimed at presenting South Africa as an investment-friendly destination included 1) successes associated with the government’s Nine Point Plan, 2) an end to loadshedding, 3) a commitment to sign outstanding renewable power purchase agreements, 4) improvement in the quality of mathematics and science education, and 5) modernisation of ports, amongst other issues.

However, SONA 2017 also included comments that will raise caution amongst local and foreign investors. These included mention of 1) a “radical socio-economic transformation” towards a more developmental state, 2) a continued pursuit of greater direct state involvement in mining, and 3) delays in the implementation of land claims and expropriation legislation, amongst other issues.

Radical socio-economic transformation

Following a statement by the African National Congress (ANC) on January 30th calling for a “radical socio-economic transformation” – via a “fundamental shift from a pure capitalist state to a state-managed developmentalist economy” – President Zuma was expected to give more detail on this important policy direction.

The president indicated that this implies a “fundamental change in the structure, systems, institutions and patterns of ownership, management and control of the economy in favour of all South Africans, especially the poor”. To this end, government “will utilise to the maximum the strategic levers that are available to the state”.

Specifically, President Zuma indicated that the state will use legislation, regulations, licensing, the fiscal budget, procurement processes and Broad-Based Black Economic Empowerment (BBBEE) charters “to influence the behaviour of the private sector and drive transformation”. Fiscal spending “must be used to achieve economic transformation”, he said.

“We reiterate that radical economic transformation should mean moving beyond share ownership schemes only. We would like to see black people involved directly in business, owning factories. The development of the Black Industrialists programme is thus critical.”

However, apart from pointing to already-issued regulations requiring big contractors to subcontract 30% of state contracts to black-owned enterprises, and warning of coming amendments to the Competition Act of 1998 aimed at addressing the need for a more inclusive economy, there was limited real detail in SONA 2017 about the ANC’s plan for radical socio-economic transformation and how large a “fundamental change” this will be from current policy trends.

Looking ahead at Budget 2017

The next important address in Parliament will be Minister of Finance Pravin Gordhan delivering his Budget 2017 speech on February 22nd. He will be expected to shed more light on the directive that fiscal spending must be used to achieve socio-economic transformation in the country.

Christie Viljoen is senior economist at KPMG in South Africa.