SA still faces fiscal slippage

Political turmoil fuels uncertainty

SOUTH Africa ran the risk of fiscal slippage if Finance Minister Malusi Gigaba gave the green light for plans to develop nuclear energy and extended government guarantees to ailing state-owned enterprises (SOEs), said Fitch Group company, BMI Research.

The firm added that South Africa, together with Brazil and Turkey, had been engulfed in heightened political risk over recent months and the outlook for economic policy was very uncertain.

Lisa Lewin, a global economist at BMI Research, said Gigaba had done well since assuming office in March because he had retained the financial prudence posture of his predecessors.

“To be fair, Gigaba has been relatively prudent so far, but things can change in the coming few months, like him giving his signature to the exuberant nuclear deal or increasing state guarantees to the already indebted SOEs,” Lewin said.

She added that the battle in the ruling ANC between the “traditionalist” and the “reformist” factions was leading to heightened political risk to the country’s economy and was largely attributable to the revising of the mining charter.

State entities

In the Budget speech in February, then finance minister Pravin Gordhan said the National Treasury had increased government guarantees to SOEs to R477.7 billion in this financial year – from R469.9bn a year earlier.

Gigaba has on many occasions said the Treasury would continue to be the enforcer across government of fiscal consolidation.

The SA Reserve Bank monetary policy committee noted in May that this year the rand would remain “highly sensitive to unfolding domestic political uncertainty, as well as decisions by the credit rating agencies”.

Kamilla Kaplan, an economist at Investec, said the weakening of the country’s institutions posed the biggest challenge to the economy.

“Rating agencies have since cautioned that institutional weakening would contribute to further sovereign credit rating downgrades.

“Heightened political and institutional uncertainty arising from the March cabinet reshuffle were highlighted as key reasons for the credit rating downgrades by S&P Global and Fitch, and by Moody’s this month,” Kaplan said.

Slow growth

Cabinet last week said it had reflected on the announcements by the three major ratings agencies after they all raised concerns with the slow pace of growth-enhancing reforms, the performance of SOEs and political risks, among other issues.

“The cabinet expressed confidence in its interventions to address the country’s economic challenges as well as work undertaken to strengthen the performance of the SOEs.

“The government remains on track in maintaining its fiscal framework, ensuring policy certainty and working to ensure inclusive growth and economic transformation,” the cabinet said in a statement.

There have been fears about and the need to avoid a downgrade to the country’s local debt to “junk” status by Moody’s and S&P Global, to prevent capital outflows and government bonds being affected

Lewin said the saving grace for the country’s economy had been the continued cash injection into emerging markets, which remained attractive to investors during this period.

“To a large extent the risks in the South African economy have become known rather than unknown… The rand has broadly appreciated against the dollar in recent months, despite the political turmoil and we expect it will remain supported in the coming months by yield-seeking capital inflows,” she said.

According to figures from the Institute of International Finance, emerging markets bonds and equities worth $152bn (R1.9 trillion) were purchased by non-residents mainly from emerging Asia.