South African President Renews Spending Commitment in Latest State of the Nation Address

In his State of the Nation speech, President Jacob Zuma has defined 2010 as the "year of action"; however, the speech has proved short on action plans, details and new initiatives.

IHS Global Insight Perspective

Significance
The speech listed government priorities, but fell short of detailing action plans. Priority areas include employment creation, education and rural development.

Implications
The government's greater involvement in employment-creating programmes and pro-poor stance imply increased government spending.

Outlook
Despite stronger economic growth, government revenue is not expected to sufficiently counteract the increased spending, thereby postponing a narrowing of the fiscal deficit.

President Jacob Zuma reiterated the South African government's "pro-poor" strategy within a developmental state in his latest State of the Nation address, delivered to a joint sitting of the country's two legislative chambers-the National Council of Provinces (NCOP) and the National Assembly-yesterday (11 February). One encouraging step forward in improving service delivery was the introduction of a "Delivery Agreement" that ministers will have to sign, which will hold them accountable for the performance of their portfolios.

Economic Support Set to Continue
Due to the fragility of the economic upswing, the government will not be withdrawing any support measures introduced in 2009. This includes upholding the public infrastructure spending programme, particularly concentrating on transport, over the next three years. Furthermore, the child support programme, extended to children over 14 years of age, will benefit an additional 2 million children over the next two years. Other measures include 6 billion rand (US$778.85 million) to help companies in distress while the government's "training lay-off scheme" and public works programme will be kept in place to benefit workers. The government claims to have created 480,000 public works opportunities in 2009, thereby reaching 97% of the goal set in 2009. However, it must be kept in mind that these jobs are of a short-term nature and not sustainable over the longer term.

Private Sector to Play Role in Power Generation
Counter to recent voices from within the African National Congress (ANC) on nationalization, the President indicated that "the participation of independent power producers" will form an integral part of a 20-year integrated resource plan, developed by an Inter-Ministerial Committee on Energy. An independent system operator in the energy sector will be established to buy electricity from independent producers and the state electricity supplier, Eskom. IHS Global Insight welcomes this approach as a more pragmatic solution to the energy crisis in the country is needed. However, regulatory issues regarding the entry barriers for independent power producers need to be addressed and implemented.

Employment Creation
Zuma concentrated a large part of his speech on government intervention in order to address the dire unemployment situation. He indicated that the new Industrial Development Programme will focus on the creation of labour-intensive industries, especially "green industries", while public employment programmes will be expanded. The focus on "green industries" may place additional pressure on government resources as companies may have to be incentivised to participate in these, often more expensive options. To facilitate the hiring of young, inexperienced people, a subsidy to help cover the cost of employment will be introduced.

Education
The President noted the deterioration in the Grade 12 (matric) pass rate over the last few years and set a target to increase the number of matric students who are eligible for university admission to 175,000 a year by 2014. However, no detail was given to underscore these intentions.

Service Delivery

Local Government
Regarding the delivery of services at a local level, Zuma said the government will work to improve the effectiveness of local government, infrastructure development and human settlements. A number of townships and settlements throughout South Africa have been hit by outbreaks of violent protests in recent months as an increasingly disgruntled public vents its frustration over the lack of basic public services, including water and proper housing. The embattled President, who was forced to issue an appeal to the country's municipal leaders, calling on them to improve the delivery of basic services to their constituents, back in October 2009, said the government "will undertake a number of key activities towards the achievement of these outcomes". "Municipalities must improve the provision of housing, water, sanitation, electricity, waste management and roads," Zuma said. Referring to the violent nature of the township protests, Zuma once again reiterated that there are "no grievances that can justify violence and the destruction of property".

Healthcare
Zuma has promised to improve the healthcare system to ensure "a long and healthy life for all South Africans". Part of this commitment includes the building and upgrading of hospitals and clinics, improving life expectancy and infant mortality rates, and reducing the high HIV infection rate. The President disclosed that the government has entered into a partnership with the state-owned Development Bank of Southern Africa (DBSA) to improve the functionality of public hospitals and their district offices. DBSA is also collaborating with the government and the Industrial Development Corporation (IDC)-another state-owned, national development finance institution that provides financing to businesses in a Public-Private Partnership (PPP) programme-to improve hospitals and provide finance for projects.

Crime
Returning to the thorny subject of crime, Zuma claimed that the government is working hard to tackle the vice to ensure that everyone in South Africa "feels safe and is safe". The President, who has identified the fight against crime as one of his administration's five key priorities, said the government will intensify its efforts to reduce serious and violent crimes, and ensure that the justice system works efficiently. To this end, Zuma disclosed that the government is implementing plans to increase the number of police by 10% over the next three years. Referring to specific types of crimes, the government has identified the fight against hijacking, business and house robberies, and contact crimes such as murder, rape and assault, as top priorities.

Outlook and Implications
On balance, Zuma's State of the Nation address-his second since assuming the presidency back in April 2009-has been received negatively, with critics pointing out the lack of detailed action plans. Many had expected the President to be more bold and assertive in outlining his government's strategy for the coming year, especially given the occasion-exactly 20 years after Nelson Mandela-to underline how life for ordinary South Africans has improved since the end of minority white rule. In the past, the President has claimed that the government has made significant progress to deliver basic services to millions of people in the past 15 years, including access to clean water, housing, electricity and basic sanitation, but significant backlogs remain, leading to the growing anger against the government, whose ability to increase investment is being checked by the current economic difficulties in which it finds itself.

Following the President's assurance that no support measures will be withdrawn from the economy at this stage, it is safe to assume that contra-cyclical fiscal measures will not be introduced in the next fiscal year. Given the greater government involvement in employment programmes, as well as the continuance and broadening of the social grant network, it could place some undue pressure on government resources. Even though the economy is expected to show stronger growth (2.5%) in 2010 than the 1.5% assumed by Treasury, IHS Global Insight does not expect the increase in revenue to counteract elevated government spending. The budget deficit could thus be more than the expected 6.2% as a share of GDP in the 2010/11 fiscal year, leading to an increase in government debt. Over the longer term, sustainability issues may emerge as it must be kept in mind that South Africa's tax base is very small, with scarcely more than 5 million individual tax payers paying 51% of all taxes on income and revenue in the country.

Of overall concern is that employment remedies include greater government involvement with little effort made to address labour absorption strategies in the form of lowering wage costs, changing hiring and firing rules, and addressing productivity. The mere fact that the unemployment rate has been far above the 20% level over the last 20 years indicates that unemployment is structurally embedded in the economy. These structural deficiencies inherent to the economy and specifically the labour market will inhibit South Africa's growth potential.

All in all, the State of the Nation speech can be seen as a wish list from the government, with very little detail on how to achieve the desired outcomes. In this regard, the state budget, to be delivered next week, as well as industrial policy direction expected from the minister of trade and industries over the next few weeks will be monitored closely.