DAVID CROSOER: Are SA’s reforms a genuine shift or rhetoric?

What to make of last week’s state of the nation address (Sona) from President Cyril Ramaphosa? Does it mark a genuine shift to prioritising economic reform and a capable state, or just reluctant rhetoric to placate some of its government of national unity (GNU) partners?

We have long held the view that as long as the ANC remains the majority party in the GNU, South Africa will be unable to prioritise the necessary economic reforms to genuinely lift economic growth above its present 2% ceiling. Is this view outdated given the now anticipated pro-market budget on February 25?

It would be rude not to concede that in rhetoric at least there has been a notable domestic shift to prioritising economic growth and (equally importantly) outlining more tangible outcomes that can hold the government accountable, from public-private partnerships (PPPs) on infrastructure to greater pragmatism about service delivery and broad-based BEE.

The emphasis on logistics reform, electricity transmission expansion and collaboration with the private sector suggests a recognition that ideology has not produced the desired results. There is also a clear shift in tone away from treating redistribution as the primary goal and towards recognising that stronger economic growth is necessary to make redistribution sustainable.

The move by the National Treasury last year to the new inflation target of 3% is a strong commitment to drive efficiencies in the economy and has been backed by the Sona speech, which will probably be reinforced by the February budget.

A lower and clearer inflation anchor should, over time, support a structurally stronger currency and lower the cost of capital. If credible, it could catalyse fixed investment, which has remained stubbornly subdued for more than a decade. It also signals that macroeconomic stability remains a core pillar of policy, even within a complex GNU framework.

Meanwhile, South African government bonds have rallied hard, partly on improved domestic sentiment but also due to a weaker US dollar (benefiting most emerging markets) and a resource revenue windfall that has improved our terms of trade and revenue outlook.

Without expenditure reprioritisation, promises of infrastructure expansion will remain arithmetic rather than economic.

The compression in bond yields reflects not only global liquidity dynamics but also a belief that fiscal consolidation may be more durable than previously feared. Yet markets are forward-looking and often generous in anticipation. The real test will come when cyclical tailwinds fade and structural reform must stand on its own merits.

Is the South African good news story then a slam dunk? Hardly. Within last week’s Sona there was a welcomed emphasis on economic growth, PPPs and operational efficiency, but also an unwelcomed overreliance on the presidency to drive reform and a foreign policy agenda that still smacks of liberation politics rather than realpolitik realism.

We have yet to see the hard trade-offs in the February budget and whether there has been a genuine effort to prioritise infrastructure spend over the wage bill, let alone a realistic increase in economic growth expectations to well above 3% per year.

Politically difficult choices

Without expenditure reprioritisation, promises of infrastructure expansion will remain arithmetic rather than economic. Fiscal credibility ultimately hinges on politically difficult choices such as moderating public sector compensation growth, improving spending efficiency and broadening the tax base through growth rather than rate hikes.

And the continued liberation solidarity with Cuba, Western Sahara and Palestine does not indicate how South Africa will thrive in a post-Bretton Woods world where middle-income countries are vulnerable to superpower rivalry.

The world will always turn out messier than we hope for. But investors who are resigned to the “good news” South Africa story not materialising may benefit from challenging their own internal assumptions and considering how to build a resilient investment strategy should the country do somewhat better than expected.

• Crosoer is chief investment officer at PPS Investments.