100 days of the GNU

7 October 2024 - In this week’s Risk Alert, we begin with an assessment of the Government of National Unity at the 100-day mark. Next, we unpack the key takeaways from the Social Research Foundation’s latest survey. We then analyse the relationship between organised business and government, and the associated risks thereof. Positive signals from the manufacturing sector follow. In our penultimate section we highlight the risk of potential upcoming labour strikes and disruptions, before closing with a look at water supply challenges in eThekwini.

100 days of the GNU

The Government of National Unity (GNU) reaches its 100-day mark on Tuesday, 8 October. Following President Cyril Ramaphosa’s announcement of his cabinet on 30 June, the ten parties in the GNU have largely settled into their work. The early days of the GNU have been marked by positive market sentiment and Rand strengthening. There have been points of tension, including the National Health Insurance Act, the Basic Education Laws Amendment Act, and the ousting of the mayor of Tshwane, Cilliers Brink. However, that parties collectively holding 287 of 400 seats in the Parliament are working together around more centrist ideals bodes well for South Africa.

From 2 January to 30 September 2024 the Rand strengthened by 7.7%, behind only the Malaysian Ringgit’s 11.9% among world currencies. Year-on-year the Rand was up 8.5%, with only the Ringgit’s 13.5% and the Polish Zloty’s 14.3% besting it. Lower yields on South African government bonds have made it cheaper for the government to borrow, and lower debt servicing costs have provided more fiscal breathing room.

But positive market sentiment will only carry South Africa so far and bears within it the risk of complacency. The next Local Government Elections will likely take place in late 2026 or early 2027; the ANC’s next elective conference in 2027 will be fiercely contested, and radical elements within the party that are more hostile to free enterprise and the Constitution will seek to extend their influence. The GNU’s best-case scenario is pushing hard on reforms to lift growth to a higher level and sustaining that, while also bolstering society’s trust in constitutional democracy and starving radical, populist forces of oxygen.

Polls show the GNU gambit paying off

Recent polling by the Social Research Foundation (SRF) will give the African National Congress (ANC) comfort in its decision to form a GNU excluding the Economic Freedom Fighters (EFF) and uMkhonto weSizwe Party (MKP). In response to the survey question “South Africa is currently governed nationally by a grand coalition —— also called a government of national unity or GNU 0—— which comprises a range of parties including the ANC and the DA. In general, do you think the GNU is working very well, quite well, quite poorly or very poorly?” 57.9% of respondents answered “very well” or “quite well”. Broken down by race, 57% of black respondents endorsed the sentiment, compared to 73% of white respondents, 51% of coloured respondents, and 31% of Indian respondents.

Regarding political party support, the SRF found that parties represented in the GNU saw an increase in their support levels compared to their election result, while the EFF and MKP saw a decline. The ANC rose from 40.2% to 45% support, the DA from 21.8% to 24%, the IFP from 3.9% to 5%, and the Patriotic Alliance from 2% to 4%. The EFF dropped from 9.5% to 6%, while MKP moved from 14.6% to 12%. So far, the centrist GNU gambit is paying off for those involved.

South Africa’s euphoric CEOs

The partnership between corporate South Africa and the state which was launched in 2023 has formally entered its second phase. The 140 CEOs involved in the initiative reiterated their commitment to the three workstreams on energy, logistics, and crime and agreed to contribute R150 million towards the initiative in 2024 (down from R250 million in 2023). Project objectives in the energy workstream include maintaining Eskom’s Energy Availability Factor above 64%, securing R23 billion of private sector investment in renewable generation capacity, and building 1,000 kilometres worth of new transmission lines. In logistics, the investment target is R28 billion for rail infrastructure and an increase in rail capacity to 193 million tonnes. On crime, the goal is to secure South Africa’s removal from the Financial Action Task Force’s greylist. The CEOs also set a euphoric GDP growth target of 3.3% by the end of 2025, as against a forecast of 1.6% by the South African Reserve Bank and an average growth rate of 0.8% since 2012.

We assess the CEO’s target as being unrealistic in the absence of substantive policy and legislative reforms, of which there has been little sign to date. Expropriation without compensation, the National Health Insurance, race-based social engineering in employment and procurement and many other policies currently on the books or soon to be implemented are substantive barriers to higher levels of Gross Fixed Capital Formation (GFCF), which is needed to put South Africa on a higher growth track. For reference, South Africa’s rate of GFCF was recorded at 15.2% of GDP in 2023, as against a National Development Plan target of 30% by 2030. The rate has only exceeded 20% once since 1994, registering 21.6% in 2008. The global average was 26.1% in 2022, the latest number available. This measure of real confidence in the South African economy has fallen far short of expectations and will continue to perform poorly if the policy environment does not improve. There is currently little sign of any appetite on the part of the GNU to tackle these constraints.

Optimism returns to manufacturing

The ABSA/BER purchasing managers index (PMI) for the manufacturing sector, which was on a steady decline since the post-Covid recovery, has shown a significant improvement to 52.8 points in September, up from 43.6 in August. The index gives an assessment of business conditions in the sector. A reading above 50 indicates that manufacturing is generally expanding. The survey results reflected rising domestic and overseas demand as well as the impact of lower fuel prices and interest rate cuts. The forward-looking index which looks at expected business conditions in six months’ time increased to 70.8 points, its highest level, reflecting a high level of optimism about improving business conditions.

Public servants demand more

The risk posed to government finances by the public sector wage bill reared into sharp relief last week. Whereas the government has offered a 3% pay increase, public sector employees are demanding 12%. The public service minister, Inkosi Mzamo Buthelezi (IFP), has his work cut out for him. He will have to find a way to manage the negotiations while supporting the Treasury’s line on fiscal prudence, which aims at generating a primary surplus. The unions, meanwhile, buoyed by the positive national sentiment, will consider this an opportune time to test the resolve of a freshly minted minister. Depending on how the negotiations go, a public service strike is on the cards in the coming months.

South Africans have been paying more for the public service but are receiving less in return, with widespread dysfunctionality across most departments. Unions have successfully leveraged their close relationship with the ANC, and by extension the government, to avoid accountability and the need to provide value for money. Public sector wage increases have therefore been granted without concomitant improvements in service delivery and efficiency. This is a further impediment on economic growth which will have to be addressed if the GNU is to meet its growth targets.

Water rationing comes to Durban

The City of eThekwini is introducing water rationing, following hot on the heels of the Gauteng metros, as reported in theRisk Alertof 23 September. For a period of 12 months starting 10 October, residents and businesses in eThekwini will need to plan around new water restrictions, with the metro being required by the Department of Water and Sanitation to reduce its water consumption by 118 megalitres per day over the next 12 months, representing an 8.4% drop in consumption. In 2023 non-revenue water, or water that is produced but subsequently lost due to leaks, non-payment, theft or metering errors, stood at 56% in eThekwini; ten years previously, in 2013, the figure was 33%. Plans to increase supply by building recycling plants and a new dam at Smithfield have uncertain timelines, suggesting that the water constraint will take at least three years to resolve, but probably longer.