SA’S RESCUEPLAN BLUES

Financial Mail - - FEATURE / DEBT DISTRESS - Claire Bis­seker bis­sek­erc@fm.co.za

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.

Last week,

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

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