The future of SA trade: what lessons can be learnt from Ramaphosa’s 2022 SONA?

Can localisation plans and the Africa Continental Free Trade Area (AfCFTA) go hand-in-hand? CHRIS HATTINGH doesn’t think so…

During his 2022 State of the Nation address, President Ramaphosa reiterated the government’s commitment to Localisation Master Plans. At the same time, he talked of the potential of the Africa Continental Free Trade Area (AfCFTA), as well as how the continent-wide area could spur economic growth, commenting that “the Free Trade agreement is about Africa taking charge of its destiny and growing its economies faster”.

The president also stressed the importance of Africa attaining the “health sovereignty” that African countries need to increase their own capacity to deal adequately with future health crises and pandemics. Unfortunately, the government’s own localisation plans will undermine both the operation and potential of the AfCFTA. It appears that South Africa’s commitment to “industrial policy” will take the inward-facing, trade-undermining route.

“REINDUSTRIALISATION” NOT NEEDED

South Africa has more than enough low-hanging fruit to improve its trade footing and capacity without needing to resort to grand schemes of “reindustrialisation”. Freeing the electricity sector from the state-enforced monopoly that is Eskom is one such example. Allowing businesses and factories to either generate or procure reliable electricity in a competitive market would do infinitely more to unlock the radical growth of manufacturing capacity than any system of politically-influenced subsidies ever will.

With the Russian invasion of Ukraine in February, yet more disruption of global supply chains is a very real possibility. South Africa could take advantage of the tail-end of a commodities boom, but the declining state of port and rail infrastructure can short-change any of those potential wins. The Eurozone is the country’s biggest export market; if commodities from Russia and Ukraine decline, those markets will look elsewhere for the gaps to be filled. With more scarcity of materials comes higher prices, and this is where South African mining and farmers could benefit – but only if they can move their materials and goods quickly and efficiently enough.

OIL PRICE RESULTS IN INFLATION

An ever-rising oil price stands to increase inflationary pressure on the economy, businesses, and consumers. In his 2022 Budget, Finance Minister Enoch Godongwana indicated that Treasury expects South Africa to average 1.8% growth across the next three years. With such low growth and increased inflation, it is possible that South Africa may not benefit substantially from increased commodities prices in any case.

The country’s ports are also in dire need of upgrades; in 2021 government implemented the spinning-off of the Transnet Ports Authority as a separate entity. This should ostensibly encourage private sector skills and capital investment in port facilities, but it remains unclear to what extent the board of the new entity will be allowed to operate independently. There is little chance that the ports will be upgraded and streamlined to a satisfactory level for as long as a national entity dictates, and the broader trade sector itself is also subjected to onerous labour regulations. It may be time for provincial governments to implement the necessary steps and take over port operations, most crucially in Cape Town and Durban.

STRUCTURAL REFORMS MISSING

The general decline of the country’s trade infrastructure should give great pause before we believe promises contained in speeches and social compacts. It is absolutely true that some mining companies are performing well, and that global demand for precious metals and other commodities could boost South Africa’s fiscal standing in the months to come.

But meaningful growth will not happen without the concrete, difficult – but absolutely necessary – operational and structural reforms required for the country’s trade potential to be fully realised. However, given the unlikelihood of the current administration truly stepping back and allowing private investment to take over ports and key rail networks, South Africa will probably only be able to take limited wins from higher commodities prices.

The AfCFTA, at its most fundamental level, aims to lower tariffs and other forms of trade barriers across the continent, to facilitate the easier flow of goods, products, and services. When countries such as South Africa seek to protect their own industries via systems of subsidies, higher tariffs, and other forms of protectionism, the AfCFTA will ultimately fall flat. If President Ramaphosa and his administration are serious about spurring on the benefits of the AfCFTA, especially for South Africa itself, they should abandon their localisation plans for the time being, and remove tariffs as much as possible.

HE SAID IT

President Ramaphosa touched on numerous other issues during the 2022 SONA. Here are his comments on some key issues:

ON FACTORS DETERRING PRIVATE INVESTMENT:

“When electricity supply cannot be guaranteed, when railways and ports are inefficient, when innovation is held back by a scarcity of broadband spectrum, and when water quality deteriorates, companies are reluctant to invest and the economy cannot function properly.”

ON THE POWER CRISIS:

“The electricity crisis is one of the greatest threats to economic and social progress. Due to our ageing power stations, poor maintenance, policy missteps and the ruinous effects of state capture, our country has a shortfall of around 4000 MW of electricity.”

ON THE PORTS:

“Over several years, the functioning of our ports has declined relative to ports in other parts of the world and on the African continent. This constrains economic activity.

“Transnet is addressing these challenges and is currently focused on improving operational efficiencies at the ports through the procurement of additional equipment and implementation of new systems to reduce congestion. Transnet will ask for proposals from private partners for the Durban and Ngqura Container Terminals within the next few months, which will enable partnerships to be put in place at both terminals by October 2022.”

ON CABLE THEFT:

“Enormous damage is caused to infrastructure like electricity, trains, and other vital services through the theft of scrap metal and cables. We will take decisive steps this year both through improved law enforcement and by considering further measures to address the sale or export of such scrap metal.”

ON CLIMATE CHANGE:

“Renewable energy production will make electricity cheaper and more dependable, and will allow our industries to remain globally competitive. Investments in electric vehicles and hydrogen will equip South Africa to meet the global clean energy future.

“We will be able to expand our mining industry in strategic minerals that are crucial for clean energy, including platinum, vanadium, cobalt, copper, manganese, and lithium. We also have a unique opportunity in green hydrogen, given our world-class solar and wind resources and local technology and expertise.”

ON STATE CAPTURE:

“Since the beginning of the year, I have been provided with the first two parts of the report of the Commission of Inquiry into State Capture headed by Acting Chief Justice Raymond Zondo. Public institutions and state-owned enterprises (SOEs) were infiltrated by a criminal network intent on looting public money for private gain. The reports have detailed the devastating effects of this criminal activity on South African Airways, Transnet, Denel, South African Revenue Service (SARS), and Government Communications.

“State capture had a direct and very concrete negative impact on the lives of all South Africans, but especially the poorest and most vulnerable members of our society. It has weakened the ability of the State to deliver services and to meet the expectations and constitutional rights of people. We must now do everything in our power to ensure that it never happens again.”

ON THE VIOLENCE IN JULY 2021:

“Earlier this week, we released the report of the expert panel into the civil unrest in July last year. The report paints a deeply disturbing picture of the capabilities of our security services and the structures that exist to coordinate their work.

“The report concludes that government’s initial handling of the July 2021 events was inept, police operational planning was poor, there was poor coordination between the state security and intelligence services, and police are not always embedded in the communities they serve. The expert panel found that Cabinet must take overall responsibility for the events of July 2021.”