SA’S RESCUEPLAN BLUES
Finance minister Malusi Gigaba is heeding the advice of business and moving from talk to action. But it is extremely doubtful whether his new action plan will lift public sentiment enough to alter the country’s growth trajectory.
The stakes are high. SA is at risk of getting trapped in a protracted period of weak economic growth that would worsen existing fiscal pressures and could land it in debt distress within five years.
Gigaba’s most urgent priority is to reassure the country about the future direction of economic policy.
The ANC’S disastrous policy conference at the beginning of July managed to sow fear over the country’s policy direction as delegates hotly debated whether land should be expropriated without compensation and the Reserve Bank be given a more developmental mandate.
Gigaba moved to reassure SA that government has a plan to ignite an economic recovery. His “action plan” lists more than 45 administrative and regulatory actions that government is committed to taking, along with a binding timetable for their implementation. Gigaba tinkers with administrative solutions to lack of growth as the country slides ever closer to a situation that could lead to debt distress or SA needing IMF assistance within a few years
While the plan might stir some hope, and put a floor under SA’S falling growth rate, none of the items amounts to the kind of structural reform that could shift the needle on growth, certainly not in time to save 2017 from being a bust.
Most relate to urgent tasks that government should have concluded already, such as appointing a new SA Airways (SAA) CEO, consulting properly over the mining charter, developing a framework for the disposal of noncore state-owned entities (SOES), restoring SOE governance and attaching conditions to SOE bailouts.
“There was no ‘rabbit out of a hat’ moment, and no expenditure of political capital here to do something difficult,” says Nomura economist Peter Attard Montalto. “Growth in the medium run will not come with a plan that doesn’t mention education or labour markets.”
In fact, one has to wonder if Gigaba really understands what it will take to catalyse growth. The type of reforms required include boosting skills and productivity; hiking investment up to at least 25% of GDP from about 19% now; slashing transport and communication costs; and increasing competition between firms.
Nomura thinks Gigaba’s plan will probably keep business onside and prevent investment growth from contracting further. It may even delay further ratings downgrades. “But we don’t see where it will provide a leg-up for more greenfield domestic investment or foreign direct investment, which is what is needed,” says Attard Montalto.
A question mark also hangs over Gigaba’s ability to deliver the plan, especially as some of the most important actions — such as the finalisation of the Mineral & Petroleum Resources Development Amendment Bill by December and the independent renewable energy producer process by February — lie with other ministers of dubious efficacy.
“While there are some parts that are encouraging, markets are sceptical about implementation given the historical experience and, even more so, given that all policies are surely up in the air given the ANC elective conference in December,” says Rand Merchant Bank strategist John Cairns.
Among the plan’s most encouraging undertakings is to reduce the issuance of government guarantees to SOES, but it would have been better had it pledged not to extend any further guarantees at all.
Total guarantees extended to public institutions amount to about R477bn, of which R308bn (64%) has already been taken up — mostly by Eskom.
According to a new debt-sustainability analysis released by the International Monetary Fund (IMF) this month, a contingent liability shock (in which 100% of SOES’ loan guarantees are realised) could push SA’S gross public debt above the high-risk benchmark of 70% of GDP by 2022 (see graph).
Persistently low growth that averages 1.1% over the medium term would also push debt above 70%. This is the level associated in other emerging market countries with debt distress and the need for IMF assistance, or even outright default.
In other words, unless SA gets its growth rate up and reins in free-wheeling SOES, it could find itself in debt distress within five years.
The IMF says its findings underscore “the urgent need” for SA to undertake reforms to increase economic growth and reduce its contingent liabilities. Insufficient progress risks fuelling a vicious cycle of weak growth and mounting debt.
In February, treasury forecast that gross government debt would peak at just under 53% in 2018/2019 and then level out. But this
What it means: Gigaba fails to grasp SA’S growth levers: investment, productivity, competitiveness and skills development