The NHI elephant in the room

18 November 2024: In this week's Risk Alert, we ask: Will the NHI's implementation spell doom for the GNU? Does a lower unemployment rate signal greater change? How can South Africa’s sovereign credit rating be improved? And, what can be gleaned from US president-elect Donald Trump’s “recess” cabinet picks?

The NHI elephant in the room

The National Health Insurance (NHI) Act continues to hang over the positive work the Government of National Unity (GNU) parties have accomplished. The manner in which its implementation is pursued poses significant risks to the GNU.

The uncompromising stance of the health minister, Dr Aaron Motsoaledi, on the implementation of the NHI creates a formidable division between the two largest GNU parties, the African National Congress (ANC) and the Democratic Alliance (DA). While answering questions in the National Assembly on Wednesday, Dr Motsoaledi disparaged critics of the NHI, specifically those who have flagged its unquantified costs, saying, “[these] massive costs we are talking about are self-created”. Waving away all concerns, the minister said, “The act is law as it is now, and is being implemented”.

Earlier this month, in a written reply to a parliamentary question, Dr Motsoaledi revealed that his department had engaged in discussions with the National Treasury around dipping into the assets managed by the Public Investment Corporation — worth around R2.7 trillion — to fund public health infrastructure upgrades. Those assets include the pension savings of government employees and other state agencies. However, as the Department of Health has already demonstrated its ineptitude in handling large sums of public money, giving it even more money seems unlikely to lead to better outcomes.

While the ANC is likely to maintain the line that “laws must be implemented”, a hardline approach such as that of Dr Motsoaledi serves to undermine the spirit and intention of the GNU. In turn, should such matters terminally wound the GNU, the country’s growth prospects will remain depressed; ultimately to the cost of the ANC itself. Cooler heads in the ANC would be well advised to devise a GNU-preserving approach to health reform in cooperation with their coalition partners.

A small jobs increase...

Statistics South Africa’s figures released last week show that the economy added 294,000 jobs, increasing the number of people employed from 16.7 million in the second quarter to 16.9 million in the third. The official unemployment rate improved by 1.4 percentage points on the back of the data, dropping from 33.5% in Q2 to 32.1% in Q3, while the number of people without jobs dropped by 373,000, to 8 million. On the expanded definition of unemployment, which includes discouraged potential job seekers, the rate decreased from 42.6% to 41.9%. While these are welcome developments, the rate remains extraordinarily high.

The improvements have been enabled by factors such as improved business and consumer sentiment since the formation of the Government of National Unity (GNU), the absence of loadshedding, lower fuel prices and lower interest rates. However, for unemployment to drop significantly over an extended period will require sustained economic growth. Achieving it depends on introducing more decisive economic reforms than have so far been adopted by the GNU. It also requires the government to move away from damaging legislation such as the NHI Act, the Public Procurement Act, the Expropriation Bill and the many pieces of racially indexed legislation and regulation that tie up the economy.

Resolving South Africa’s severe unemployment crisis should be a top priority for the GNU. If it fails to spark the growth needed to create large numbers of jobs, unemployment will continue to rise. This will provide the opportunity which revolutionary parties such as the Economic Freedom Fighters and uMkhonto weSizwe have been waiting for to find a route into government.

...followed by a small ratings boost

The positive market sentiment boost provided by the formation of the GNU to South African stocks and assets received more substance last week, when S&P Global delivered a welcome update to its outlook on the country’s sovereign credit rating, shifting from “stable” to “positive”.  This puts the prospect of an upgrade on the table. While a boon for the work done up to this point by the GNU, South Africa remains three notches below investment grade and much work is needed to move in that direction. Ratings agencies such as S&P will be watching for sustained, substantive reforms and evidence of fiscal credibility before upgrading their ratings.

In its latest credit rating review, S&P applauds the government for pursuing fiscal consolidation, concluding that the “positive outlook reflects the potential for stronger growth than we expect”, with the proviso that the coalition government will have to “accelerate economic reforms while addressing infrastructure- and fiscal-related pressures”.

The work done by the National Treasury to stabilise the country’s debt-consolidation commitments was evident in the 2024 Medium Term Budget Policy Statement. But to speed up the increase in private investment, which S&P views as crucial for the country’s prospects, those GNU parties that agree on the imperative for higher growth rates must reform race-based policies and legislation, strengthen property rights, and open up network industries such as electricity generation and distribution, as well as port and rail operations, to meaningful private sector investment and competition.

The Trump cabinet takes shape

United States (US) president-elect Donald Trump, who will assume office on 20 January 2025, has begun announcing his cabinet picks. To avoid delays in having to wait for his appointments to be confirmed, Mr Trump has demanded that all potential Republican leaders in the Senate allow him to make “recess appointments”. These are temporary appointments to cabinet positions made while the Senate is in recess, which will allow nominees to start work immediately and only undergo confirmation hearings later.

Mr Trump has a habit of shifting policy positions and not holding strong ideological positions except on immigration and tariff policy. The staffing of his administration will therefore have a profound impact on the direction of his administration.

His picks represent a heterogenous collection of people who represent different factions of the Republican party and who do not represent a consistent policy platform. However, Mr Trump appears to have strived for balance by rewarding all the major factions within the Republican party with positions in his government, while also ensuring that his picks have demonstrated their loyalty to him personally.

While this will help cement his power in the party for now, it suggests that members of Mr Trump’s cabinet could pursue divergent paths on critical issues. This could hamper the effectiveness of his administration, especially if he is unable to articulate a unifying vision and does not firmly resolve disputes when they arise. He might also have to expend significant political capital early on in his administration to get senators from his own side into line to get many of these nominees confirmed.

Two picks that South African observers will be paying close attention to are Marco Rubio for secretary of state, and Elon Musk and Vivek Ramaswamy in the newly formed “Department of Government Efficiency”. Mr Rubio is usually characterised as a hawk on foreign policy, but also has a reputation for morphing his positions to suit the current zeitgeist of the Republican party. However, he has taken strong pro-Israel positions in the past, which could put US foreign relations at odds with those of South Africa, which has sided with Iran — an avowed enemy of Israel and backer of terrorist movements like Hamas and Hezbollah.

Mr Musk and Mr Ramaswamy will be tasked with deregulating and liberalising the economy. Some commentators suggest that this will be nothing more than a committee which produces a report, while others suggest it will be a platform to launch a grand restructuring of the federal government. If Messrs Musk and Ramaswamy succeed, it will turbo-boost the US economy and create a large gap between competitor economies that do not embark on corresponding liberalisation programmes. This is more reason for the South African government to move decisively towards introducing market-friendly economic reforms and fiscal consolidation.

Should the US pursue a more punitive footing on trade matters under Mr Trump’s second administration, those countries with high debt burdens, lower sovereign credit ratings, and policies that inhibit growth and job creation will be more vulnerable to harsh global winds.