SONA: Markets sceptical and rather recovered on global overreaction - Chris Harmse
Although President Cyril Ramaphosa, during his State of the Nation Address (Sona) last Thursday evening, tried to indicate the structural adjustment economic processes that the Government of National Unity is likely to introduce in the next three years, analysts, political commentators, and economists remain sceptical.
Some of the strategies were already supposed to be introduced under the previous ANC government, but they did not materialise.
These include: “Eskom is on course to complete its unbundling process by December 2022.” (2022 SONA); “Within 100 days, we will finalise a comprehensive social compact to grow our economy, create jobs, and combat hunger.” (2022 SONA); “Our economy today is three times larger than what it was 30 years ago.” None of these indeed succeeded. Eskom is not unbundled; the social compact is non-existent, and in real terms, the economy is only 1.9 times higher than 30 years ago. The chances that the economy would grow at 3% in the short run are also very slim.
The President once again refers to statements that are doubtful or will not be achieved, such as: “We have built meaningful partnerships between government and business, labour, civil society, and other social partners to drive growth and development.” It is quite clear that growth and development have not emerged, as South Africa’s economic growth rate on average is the lowest in the last decade, as well as the previous five decades. The country has the most skewed income distribution in the world, and the unemployment rate remains at the same level over the last ten years.
Therefore, scepticism remains against the statement of the President that: “Government will spend more than R940 billion on infrastructure over the next three years. This includes R375 billion in spending by state-owned companies. This funding will revitalise our roads and bridges, build dams and waterways, modernise our ports and airports, and power our economy.”
The experience of the ability of state- owned enterprises to use these funds efficiently without state capture and tender irregularities puts a huge doubt on these plans. Therefore, the expectation that these huge investment projects will succeed is in doubt. Worries about the ability of the government to revitalise municipalities also emerge.
The President announced that: “Starting this year, we will work with our municipalities to establish professionally managed, ring-fenced utilities for water and electricity services to ensure that there is adequate investment and maintenance.”
Given the labour laws in South Africa and the role of labour unions, replacing unqualified and unprofessionally managed utilities with large cadre deployment at the municipal level simply is not realistic.
South African financial markets last week recovered strongly as global markets evaluated the effect of US President Donald Trump’s reforms as an overreaction on risky asset markets. Share markets across the world returned to business as usual as the losses of the previous two weeks were wiped out.
On Wall Street, the S&P 500 index closed Friday 1.0% higher for the week and is 2.7% up since the beginning of the year. This is despite the disappointing increase of only 147 000 new jobs in the non-farm payrolls during January. The unemployment rate remains around 4%.
On the JSE, the all share index had grown by 2.02% over the last seven days to reach a new record level of 87 474 points at the close on Friday. The index is already 3.7% higher for the year to date and 17.3% up from a year ago. The price of gold shot up by 3.5% last week, reaching a new record level of $2 880 (R53 018) at one stage on Friday.
The demand for South African shares, bonds, and precious metals also led to the Rand exchange rate recovering to its level before Trump’s tariff announcements. Against the US dollar, the Rand recovered by 25 cents last week and traded at R18.37 to the dollar on Friday, equal to its strongest level for the year.
Given that the Brent oil price also decreased by $2 per barrel last week to $74.44 per barrel, one can expect that the current under-recovery of around 40 cents for petrol and 50 cents for diesel may be wiped out over the next two weeks.
This coming week, investors around the globe await the testimony to the US Senate by Federal Reserve Chair Powell, as well as the release of the US inflation rate data this coming Wednesday. It is expected that the US core inflation rate came down from 3.1% in December 2024 to 3.0% in January 2025. US retail sales numbers for January will be released on Friday. The UK and EU will release their latest estimates of their gross domestic product growth rates for quarter four 2024.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT