South Africa policy package unlikely to change GDP path-Fitch

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THUR, JULY 20 2017-theG&BJournal-FITCH-The South African government’s newly announced Inclusive Growth Action Plan is unlikely to significantly boost economic growth prospects, Fitch Ratings says. Most of the measures have been previously announced.

Planned changes to the governance standards for state-owned enterprises (SOEs) would be important, but the main obstacle to improving SOE performance remains the implementation of governance standards in day-to-day operations.

The Minister of Finance presented the programme on 13 July as a reaction to the recession in 4Q16-1Q17. However, most initiatives focus on SOE governance, containing pressure on public finances, and boosting black economic empowerment and addressing inequality, which would only have an indirect impact on growth prospects. Many measures were already announced, for example in the nine-point plan in President Zuma’s February 2015 State of the Nation address, or are part of regular processes, such as the commitment to a sustainable public sector wage deal.

Positively, the new package adds firm deadlines for many of the measures. Some of these deadlines are tight and not all may be met, but they add urgency to policy-making.

SOE-related measures had been proposed by an inter-ministerial committee on reforming these companies. SOE governance is relevant both to growth, as the sector is a large component of the economy, and the public finances, through guaranteed (7% of GDP) and non-guaranteed (10.5% of GDP) SOE debt.

The fact that the measures have not already been approved points to how highly politicised they are and that their implementation cannot be taken for granted. In addition, a major reason for the weak performance of SOEs has been failure to implement existing rules. Clear evidence of improvements in the SOE governance framework and their strict implementation would help to contain the risks associated with contingent liabilities for the sovereign.

The package announced a commitment to choose the cheapest plan for South Africa’s electricity capacity development, which would seem to preclude nuclear power in the near term. However, government messages on the costly nuclear power plan have changed repeatedly and the issue is unlikely to be settled until after the electoral conference in December 2017 that will choose the new ANC head.

The Treasury will explore an economic support package, according to the announcement. This would re-prioritise rather than raise overall planned expenditure but could raise the risk of over-spending if cuts to offset higher spending elsewhere don’t materialise as planned.

We reduced our 2017 real GDP growth forecast for South Africa to 0.6% from 1.2% in our June Global Economic Outlook. We also lowered our 2018 forecast to 1.6% from 2.1%. The lower forecasts reflect weak first quarter results this year and that political uncertainty will continue to weigh on companies’ willingness to invest.

Weaker trend GDP growth than ratings peers, partly due to a deteriorating investment climate, is a key weakness for South Africa’s ‘BB+’/Stable sovereign rating, which we affirmed in June.

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