Five ways Ramaphosa presidency can fix - or hurt - South Africa

With South Africa hopefully moving on from an ailing economy under the Zuma administration‚ PwC economists have presented five possible future scenarios for South Africa over a five-year horizon (towards 2022).

The varying degrees of success that President Cyril Ramaphosa may have with making the necessary changes to improve governance and the health of the South African economy will be informed by economic growth‚ sovereign ratings‚ the results of the 2019 general elections and the trajectory of the rand exchange rate‚ they note.

The most likely scenario‚ they predict‚ is that President Ramaphosa is able to make the necessary changes and reforms to help economic growth accelerate to as high as 3% by 2022.

"PwC sees a 75% probability of improved economic growth under President Ramaphosa compared to the preceding several years‚" the economists predict. However‚ actual economic prosperity - which would require economic growth in excess of 4.5% - is seen as highly unlikely.

The downside and worst-case scenarios see little to no improvement in job creation and economic growth. The baseline scenario – entitled #Ramaprogress – sees more success in job-creating growth based on notable reforms under the president’s New Deal agenda. This translates into real economic growth rising to 2% in 2020 and 3% by 2022. And as fiscal dynamics improve‚ the ANC would improve its performance in the 2019 national elections‚ ending a recent decline in support. The upside and best-case scenarios see even greater reform success that accelerates economic growth even further.

Here are the PwC economists' five scenarios for the Ramaphosa years:

- Scenario 1: Mouldy mess

Probability: 5%

President Ramaphosa started his tenure as ANC president with an immediate positive impact‚ including the appointment of skilled leaders at troubled Eskom and making some progress in starting the process of addressing state capture. However‚ these changes did not have a lasting impact. The attempted turnaround at the power utility had lacklustre results due to Eskom’s legacy costs of poor management and planning. The state capture enquiry dragged on for several years with little tangible actions against transgressors. ANC policy changed very little‚ and job creation continued to disappoint. These issues were large blots on President Ramaphosa’s presidency.

The ANC National Executive Committee (NEC) removed President Ramaphosa’s predecessor in early 2018 with limited consultation with its branch structures.

This frayed the relationship between the party’s national leadership and provincial structures. Furthermore‚ while there was overwhelming support in the NEC for Mr Zuma’s recall‚ many of the new NEC’s membership and provincial leaders were prominent in the previous administration‚ with high stakes in a business-as-usual approach. As a result‚ President Ramaphosa spent much of the lead-up to the 2019 elections dealing with party-related challenges as well as campaigning for the poll; leaving little time to implement his planned reforms.

The 2019 elections delivered another disappointing result for the ANC. Because of weak levels of continued service delivery at local government level‚ voters did not give the organisation an outright majority for the first time in post-1994 South Africa. The ANC was able‚ through alliances with smaller opposition parties‚ to piece together a ruling coalition – something that the new South Africa had never seen in national government. The coalition was troubled from the start by the ANC trying to continue running government as before‚ while smaller members of the coalition were able to disrupt policymaking and governance with threats of leaving the pact and forming a new government with larger opposition parties.

In the absence of much improvement on the policy and governance front‚ business and consumer confidence remained pessimistic. Investors in particular were concerned about the expropriation of land without compensation. Employment creation continued to be insufficient to absorb the growing number of school leavers entering the labour market each year. Businesses focused on international expansion for revenue growth and maintained limited domestic investment spending. As a result‚ economic growth remained stuck below the 1% level seen just before the departure of Mr Zuma from the Union Buildings. Clearly‚ not all the problems within the ANC could be blamed on just one man.

This economic growth performance was insufficient to make a real impact on fiscal dynamics from an income perspective. The government continued with sizeable fiscal deficits and rising public debt (as percentage of GDP). Unsurprisingly‚ rating agencies implemented another two rounds of ratings downgrades‚ taking the sovereign deeper into non-investment grade territory. Credit ratings only stabilised in 2020‚ although this was more a case of reaching a deep point of weakness rather than any real effort by the government to address the negative tide. This economic and political situation chipped away at South Africa’s competitiveness as an investment destination‚ eroding some of the strong points identified earlier in this document. This weakened competitiveness reduced the value of the South African rand as both a producer of goods and services and an investment tool. As a result‚ the rand depreciated to an average of R18.20/$ in 2022. This contributed to higher consumer price inflation and upward adjustments in interest rates‚ alongside a decline in GDP per capita.

- Scenario 2: Coming up short

Probability: 20%

The first two months of President Ramaphosa’s ANC presidency included many positive moves as he picked low-hanging fruit. These included the start of a turnaround for Eskom‚ judicial developments surrounding key corruption and state capture cases‚ a more focused fiscal budget‚ and the broadcasting of a positive ‘South Africa is open for business’ message to international investors. Local financial markets rallied as the new broom swept through the corridors of the Union Buildings‚ igniting hope of an improvement in governance and economic conditions when President Ramaphosa took over the national leadership.

The wheels of change were indeed moving‚ as he told attendees of the WEF in Davos during January. Perceptions of the quality of governance improved as South Africans perceived lower levels of corruption. However‚ the quick implementation of these early changes – popular with the media‚ low in cost and highly visible – failed to gain momentum. Elements within the ANC as well as local‚ provincial and national government‚ whose way of doing government business under the Zuma administration remained largely unchanged‚ stifled President Ramaphosa’s reform ambitions. In turn‚ policymaking structures within the ruling party had to resort to populist policies to win national elections in 2019 (by a small majority) and local government polls in 2021.

An expected business-friendly Ramaphosa administration was not as favourable as suggested by New Deal promises. The private business sector did not react positively to this policy trajectory‚ with business confidence remaining pessimistic. Economic growth recovered to around 1.5% by 2020‚ rising slightly above the population growth rate. However‚ this remained significantly below potential. The country’s policy direction did not really address the triple challenges of poverty‚ inequality and unemployment. A key issue here was the need for changes to the labour market/relations between the private sector and labour organisations in order to encourage job creation at a faster pace.

South Africans grew tired of the situation‚ as economic conditions failed to change much for them after Mr Zuma retired to Nkandla. The country’s unemployment rate failed to decline‚ and a strengthening in the rand exchange rate in early 2018 soon fizzled out – resulting in higher inflation rates. Because of this continued malaise‚ the ANC lost more support during the 2019 national elections‚ but was able to retain a majority in the National Assembly.

The period 2019–2022 witnessed only a small improvement in overall quality of governance as the ANC made small reforms in order to appease their labour partners. However‚ these changes were not effective in improving the country’s fiscal and public debt dynamics. On the contrary‚ weak economic growth and pressure from labour unions resulted in further deterioration in fiscal dynamics. As a result‚ rating agencies downgraded the sovereign’s local and foreign credit ratings again in 2018–2019 before they stabilised.

President Ramaphosa had to shelve many of his New Deal plans in order for the ANC to remain in power‚ and the grand plan joined the NDP in being a ghostly plan for resurrecting the Rainbow Nation. Continuing policy uncertainty in primary sectors (in particular property rights in the mining and agricultural industries) hampered investment in these industries. Power and water utilities remained in financial and management doldrums. Business and consumer confidence failed to recover to positive territory.

All of this resulted in the international community continuing to price in high levels of political risk and low levels of productivity growth for South Africa. The rand followed a steady weakening path from the middle of 2018‚ and averaged R16.90/$ in 2022. Weak economic growth‚ sovereign rating downgrades‚ policy uncertainty‚ weak business and consumer confidence and continued poor quality of political governance resulted in disappointing levels of FDI and foreign portfolio investment into the country. All combined‚ these factors resulted in no real progress being made in addressing South Africa’s triple challenges as the country passed the halfway mark of the NDP’s vision for 2030.

- Scenario 3: #Ramaprogress

Probability: 50%

By the time President Ramaphosa finished his maiden SONA on 16 February 2018‚ it was already clear that his government would have a significantly different face from that of the preceding Zuma administration. The first two months of the new ANC leader’s party presidency set in motion changes that lifted the spirits of South Africans and investors‚ helping the rand appreciate to its strongest levels against the US dollar since before the axing of Mr Nene in 2015.

As a new broom swept through the ANC‚ Luthuli House and the national government‚ President Ramaphosa’s ten-point action plan and New Deal agenda were front-and-centre when it came to policymaking and communication with investors. A focus on job creation‚ economic growth and investment was evident‚ as was the prioritisation of turning around financially troubled SOEs. South Africans observed a renewed vigour and focus within the ANC on national issues instead of party politics.

Nonetheless‚ while reforms were implemented at a steady pace in some areas‚ some of the country’s structural weaknesses hampered improvements elsewhere. For example‚ the desire to improve access for all to quality education delivered limited results. The country’s education system had produced a disappointing quality of school leavers over the preceding two decades‚ which was a key challenge for the country concerning employment creation. The education system’s challenges were deep and could not be fixed within a few years.

This contributed to the challenges faced by President Ramaphosa in revitalising the manufacturing sector as a job-creating machine. While manufacturing-focused companies and investors welcomed incentives and the increased rollout of SEZs‚ high energy and labour costs‚ competition from Asian rivals and slow progress in implementing free-trade agreements on the African continent continued to place pressure on manufacturing production. Investors in the secondary sector remained vigilant about the uncertain long-term prospects of a more competitive operating environment.

Admittedly‚ while President Ramaphosa did not make much progress in the areas of education and manufacturing‚ many of his other aspirations were set in motion. Experts from all spheres of the South African economy were appointed to his newly created Presidential Economic Advisory Council‚ and interaction between labour‚ business and government under the auspices of the National Economic Development and Labour Council (Nedlac) grew from strength to strength. Social and labour unrest remained more subdued‚ as seen during the 2016–2017 period.

In response‚ business and consumer confidence returned to positive territory‚ and companies and households increased their consumption and investment expenditure. FDI improved alongside this rising sentiment. As a result‚ economic growth recovered to 2% by 2020 and 3% by 2022‚ with the unemployment rate inching lower. The rand averaged R15.60/$ in 2022 as a stronger export performance and investment inflows supported the South African currency.

A healthier pace of economic growth and improved administrative efficiency by the South African Revenue Service (SARS) boosted tax revenues and helped stabilise the fiscus. The National Treasury returned to a commitment to narrow the budget deficit (as percentage of GDP) and achieved a peak in public debt (as percentage of GDP). In recognition of the significant progress made‚ rating agencies did not make further downgrades to the sovereign’s creditworthiness assessments.

An overall improvement in the country’s economics and politics enabled the ANC to improve its performance at the ballot box during the 2019 national elections and 2021 local government elections. The party retained a majority and the quality of business in the National Assembly improved significantly under President Ramaphosa’s guidance. The relationship between the ruling party‚ on the one hand‚ and opposition parties‚ on the other hand‚ was also much more amicable from 2018 onwards. A significant reduction in political noise was observed compared to the Zuma administration.

- Scenario 4: The New Deal

Probability: 20%

The New Deal vision reignited the ideals contained in the NDP‚ and SONA 2018 debuted several of the key ideas behind this vision. A jobs summit was organised within months of President Ramaphosa taking the reins at the Union Buildings in order to discuss practical solutions to youth unemployment. Soon afterwards followed the launch of the Youth Employment Service Initiative that placed tens of thousands of unemployed youth in paid internships in the private sector. A small business and innovation fund for start-ups also aided young entrepreneurs in establishing their own enterprises.

President Ramaphosa’s desire to see the manufacturing sector lead the creation of jobs received strong and focused attention across all relevant ministries. Localisation – which public entities show a preference for‚ purchasing locally produced goods – formed the core focus of this initiative. Government geared its incentives towards encouraging increased manufacturing of import-substituting goods as part of a reindustrialisation process. The rollout of SEZs in particular attracted significant interest from foreign investors.

The process of localisation also had a key focus on transformation of ownership of private enterprises. The Ramaphosa administration actively used competition policy in order to diversify activity in markets where there was a high concentration of large companies. Under the New Deal‚ radical economic transformation was‚ however‚ not as ‘radical’ as many investors had feared. The campaign took shape under President Ramaphosa’s guidance as a process of creating fundamental improvement in the lives of impoverished South Africans. (‘Fundamental economic transformation’ is a much more accurate description of this process.)

To be fair‚ many of the New Deal’s aspirations could not be achieved in a five-year period. However‚ the Ramaphosa administration built a strong foundation for long-term economic success on top of quick gains seen in improving the quality of governance. The much-improved economic and political outlook resulted in a notable recovery in business and consumer confidence. Combined with increased foreign investment‚ economic growth recovered to 3% by 2020 and levels above 4% in 2022. The rand averaged R14.50/$ in 2022.

A significantly improved fiscal situation also materialised. Accelerated economic growth improved the government’s revenue situation while a decline in wasteful expenditure also contributed to a reduced budget deficit. This enabled the Ramaphosa administration to turn a corner concerning public debt‚ which had crept higher under the Zuma administration. As a result‚ the country was able to stabilise its ratings downgrade quickly‚ with the sovereign eventually regaining its investment-grade rating. The 2019 elections rewarded the Ramaphosa administration with a rise in support for the ANC.

- Scenario 5: Prosperity

Probability: 5%

South Africa reached economic prosperity – economic growth in excess of 4.5% per annum from 2022 – under the Ramaphosa administration after the implementation of the New Deal‚ as well as making other important reforms not contained in the plan. These included the privatisation of some SOEs and the greater involvement of private companies in‚ for example‚ the electricity-generating industry. An important issue that was not on the New Deal agenda was changes to the labour market. South Africa reduced rigidity in the labour market by ensuring that wage determination was much more responsive to company-specific circumstances as opposed to the dominance of collective bargaining. This was an important linchpin in the revival of the manufacturing sector. Stronger export competitiveness supported the rand‚ which averaged R13.30/$ in 2022.

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