It’s Time to Get Ruthless, Mr President

Announcing a second multi-billion-dollar bailout for Eskom within five months, Finance Minister Tito Mboweni cut to the chase. “We are facing an extremely serious financial situation,” he told Parliament.

As Bloomberg saw the situation, the financial crisis confronting our state power utility has become a national debt problem. The bailout may force the cash-strapped government to increase borrowing and taxes. That could in turn trigger a credit-rating downgrade and massive outflow of funds, raise the cost of new debt and stymie efforts to revive the moribund economy.

So, where does this leave President Cyril Ramaphosa and his promised “New Dawn” that would restore investor confidence and set our country on a sustained economic growth path?

The fraught situation he now confronts has narrowed even further his room for manoeuvre to bring about essential reforms. The situation is exacerbated by his party’s paralysis in making key policy decisions over the past several years due to its inability to come to terms with conflicting, factional interests within its ranks.

In fairness, the New Dawn has appeared in at least one area: his efforts to restore good governance by exposing state capture, corruption and fraud that has cost inestimable billions of rand. Without directly involving himself in the clean-up, he has skilfully resisted, at least at this stage, an intense push-back and created space for judicial commissions of inquiry to uncover malfeasance without fear or favour and in full public view. He has also replaced errant officials with credible professionals in key institutions such as the South African Revenue Service and the National Prosecuting Authority.

Beyond that, President Ramaphosa finds himself in a very tight spot. He now has little option but to use the same resoluteness to act in at least four other areas: the political arena and in economic, macro and fiscal policy.

The Political Arena

The ANC’s decision to implement a policy of land expropriation without compensation is the single biggest concern among investors. Faced with pressures to include even productive land in policy implementation, President Ramaphosa has tried to soothe investor fears by emphasising that land will be redistributed in such a way that it will not dislocate economic growth.

However, President Ramaphosa has at least one option to defuse the issue, at least for some time. He should move swiftly to start large-scale redistribution of vacant, unutilised state-owned land. This would demonstrate that the aspirations of the landless can be met to a significant degree without resort to extreme measures, but he needs to act resolutely and, indeed, ruthlessly. This would provide greater certainty to investors, give hope to the landless and go some way to placating his more radical opponents.

Economic Policy

The President needs to end uncertainty over policy on a number of issues. Just two examples:

• Implementation of government’s laudable renewable energy policy, which has supported more than R200 billion in investment, has been stalled due to push-back from coal interests. Investors have been left high and dry.
• Onerous, cumbersome visa requirements for foreign visitors are holding back our tourism industry and its considerable growth potential. A number of issues have remained unresolved.

The President also needs to end uncertainty on issues such as these and to do so by acting resolutely and ruthlessly.

Macro-economic Policy

Sadly, there is no or very little room to move here. The interest rate recently came down by 0.25%, and most economists think government can only move interest rates down by another 0.5% – 0.75% in the next year. Further reduction would weaken the rand and capital would leave the country in search of higher interest rates elsewhere.

Fiscal Policy

Government needs money. There is little to no room to increase income tax as the number of people actually paying tax is small and already over-burdened. Government increased VAT last year and dare not raise the rate again.

Borrowing money is becoming a rapidly diminishing option and will be more so if the remaining investment rating agency reduces us to junk status. The President and his team therefore need to find new revenue streams.

So, it’s not simply an observation. The President really is in a tight spot.

Ironically, what is in favour of him taking unpopular decisions is the very fact that he and his governing party have such limited options. The President should turn the situation to his advantage by pointing out that he has no option but to take certain decisions to restore investor confidence and economic growth, unpopular as they might be in his party and among its allies.

But if he does so, he will need to implement his decisions with resoluteness and even ruthlessness. It seems there’s no other way out.