Cautiously optimistic about SA but structural problems remain – S&P Global’s Nezo Sobekwa

The local currency, banking stocks and local sovereign bonds gained after the re-election of President Cyril Ramaphosa was confirmed. The outlook for South Africa, says Nezo Sobekwa, African risk analyst at S&P Global Market Intelligence, is “cautiously optimistic”, but he did not foresee that things were going to turn around in the short term. Electricity, water shortages, reliance on imported fuel and Transnet remain a concern. Energy policy inconsistency is likely to remain in the short term. Sobekwa said he expected that President Ramaphosa will, with his new mandate, start tightening the screws on corruption, but it remains to be seen “if the buffalo can gain some momentum”. – Linda van Tilburg

Policy inconsistency in the energy sector likely to remain  

One is tempted to just begin by saying that, of course, Ramaphosa managed to consolidate some power. This should give him some room to be more aggressive in pursuing a couple of economic reforms that are really important from an investment perspective. His biggest stumbling block is also his biggest, one of his biggest allies. It would seem in the national executive committee, Minerals Minister Gwede Mantashe, is also the returning chair of the ANC. This means that within the ANC he’s a massive ally and has been able to ensure that Ramaphosa was elected so that he can run for the presidency in 2024. However, Mantashe is also the biggest coal supporter in the South African economy, and Ramaphosa is going to have to find a way to manage that. As we know, in a couple of instances, Ramaphosa and Mantashe have come out in the media and said contrasting things. Ramaphosa has at least on one occasion pulled rank and shifted policy over his minerals minister. I do know, for instance, that the threshold for power generation for independents at some point was only ten megawatts. And that’s what Mantashe had announced. Less than 48 hours later, the president came on air and actually said, I want to lift that up to 100 megawatts. And so we’re likely going to see that kind of policy inconsistency in the energy sector, which is very crucial for investment, continue over the next couple of months. It will be interesting to see once he gets through the election, if the ANC comes up victorious, whether or not Ramaphosa will shift his cabinet and perhaps move Gwede Mantashe to a different portfolio in order to move more aggressively in the energy sector. Notwithstanding that, of course, that very coal lobby that Gwede Mantashe supports so aggressively is a very important constituency for Ramaphosa, one that he doesn’t want to alienate ahead of that election. There are going to be quite a bit of negotiations, at least in the next 12 months before we get to 2024, when I think Ramaphosa will be able to move more aggressively afterwards.. 

On an olive branch likely to be extended to Kwazulu-Natal and dealing ‘aggressively’ with NSZ and Sisulu

In the first instance after this conference, regional representation, particularly for KwaZulu-Natal, is clearly lacking in the new top seven of the National Executive Committee. And so he’s going to have to find a way to extend an olive branch, if you will, to KwaZulu-Natal and in some ways get the likes of Senzo Mchunu and Mdumiseni Ntuli into his cabinet in order to give KwaZulu-Natal some sort of power. Kwazulu-Natal is of course the biggest constituency in the ANC branches and he’s going to need their support moving into 2024. He’s going to have to find creative ways to legitimise them after their defeats they suffered in this NEC so I foresee him giving them some important roles, I think both in the party and perhaps in government. So, we might see some fresh KZN faces in government come 2024. Certainly though the likes of those who have been very vocal against Ramaphosa and in fact challenged his position for the presidency in this conference. Now I speak here to Nkosazana Dlamini-Zuma and Lindiwe Sisulu. I certainly think that within his cabinet there have been voices of dissent that I foresee him dealing with rather aggressively from a Cabinet point of view. Both of them are in his cabinet. The one is Minister of Corporate Governance. The other is the Minister of Tourism, so he needs to at least deal with those portfolios swiftly.

Ramaphosa will be tightening the screws on corruption  

This is what we would all like to see happen. I think with him having less to lose, he should.  He sounded like somebody who doesn’t mind being disposable, if needs be. I mean here is when the Section 89 panel came out and said that perhaps he’s contravened the Constitution; he was the first to put up his hand and say, well, I’m happy to move out of the way if it means the reputation of the party will be saved. Being able to do that speaks to somebody who does feel he’s in a position to negotiate less and that if you want him, you should have him. I think what they did in response was to say, actually, we do need you. All things being equal, you’re still the best shot for us to make sure we come out on top in 2024 and we are willing to stand behind you. Something that they were not willing to do for other members of the party, for instance, the health minister, who is yet to be found guilty. But based on the reputational damage to the party when those allegations were made against him, was asked to step down. And so the change of tune as far as Ramaphosa is concerned, says to me that Ramaphosa has got some level of leverage with a much friendlier NEC that he had in 2017. And so we are expecting to see a faster pace. We think that he’ll be able to move around the chess pieces with a greater level of ease. You certainly think he’s going to turn up the scrutiny of corruption, cases of concern. The findings of the Zondo Commissions are probably going to have some real implications come out of it now. This is not to say that he doesn’t still have some strategic decisions to make

We’ll see if the buffalo can gain some more momentum 

He’s been a very cautious president, as you’ve noted. Of course, I think the reason for this has been that he had to negotiate his way into getting a second term. We’ve yet to see in the past three leaders of the ANC, somebody who finishes his second term, from Thabo Mbeki to President Zuma. They have not finished their terms. I think he wanted to make sure that he could consolidate enough power to at least finish his term. He’s been aggressive on the investment front. He’s made a lot of pledges. In fact, he’s been so bold that even in the energy sector, he’s been willing to lose some seriously important infrastructure here. I mean, for instance, the oil refineries. He’s not budged in terms of the regulations in order to align with the conditions for the billions that he has been able to secure for the Just Energy transition. So, I think he’s going to want to honour that as far as the business world is concerned. I do think he’s got more room and we all want to see him move swiftly. I guess what I’m saying is the biggest stumbling blocks are out of the way, he’s got greater leverage and we’ll see if the buffalo can just gain some more momentum. 

Cautiously optimistic about South Africa but electricity, water shortages, reliance on imported fuel and Transnet remain a concern

 Well, let’s be cautiously optimistic. South Africa’s got some real structural problems. Electricity is not one that’s going to go away in the next year. The capacity for the country to generate electricity in an effective way is a very, very big problem. We’ve seen unprecedented levels of loadshedding. In 2022, we’ve seen more hours of loadshedding than we’ve seen in the past two years put together. We’ve also now begun to experience water shortages due to infrastructure insufficiencies at the local municipal level. This is not to say that South Africa, though it is a semi-arid country with very low levels of rainfall compared to the rest of the world, doesn’t have the capacity to capture whatever rainfall it does have. In fact, it is sufficient and we’ve seen better levels of water reservoirs, but there’s just too many leaks between these storage facilities and the tap and between the storage facilities and the major industries that need them – in manufacturing, in agriculture and even in the IT industry with the data centres that have begun to open up all over the country. 

So, the electricity shortages and water shortages are a big concern from an investment point of view. We think that Ramaphosa has got more leeway, at least on the Eskom part of things, to be more aggressive. But again, this is not going to turn around in the next 12 months and far beyond the next 24 months. We saw the CEO of Eskom, Andre de Ruyter, resign just a few days before the conference, which is a concern. And then, of course, the fact that South Africa is no longer refining its own fuel means that it’s more reliant on imported fuel, for at least for 60% of its needs, which is a sharp increase over the past 24 months when it needed far less imports. South Africa has vulnerabilities on supply chain disruptions, operational disruptions. We saw in June that a fuel tank was delayed at sea for two weeks which translated into jet fuel shortages at Cape Town, Tshwane and Johannesburg. This, of course, resulted in the cancellation of flights and a big knock to tourism. But it also meant that on the ground, cargo was delayed. We also saw that Transnet, which is the main transport entity of the government, suffered a number of breaches and sabotage attempts. Those are some serious issues that Ramaphosa now has to deal with. We’ve got a very disciplined Treasury. We’ve got a very disciplined Central bank from an inflationary point of view, from a currency exchange point of view, I think we’re doing pretty well. But we’ve got some structural issues that Ramaphosa has more power to deal with now, and he needs to hit the ground running. So, no, not in the short term, things are not going to turn around quickly from an investment positive perspective. But certainly it is far more optimistic than it was before this conference, especially from the corruption point of view. We think we’re going to see more delivery from a governance point of view moving forward.

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