Moody's sees stalemate in SA structural reforms

Cape Town – Ratings agency Moody’s Investors Service expects that a continued stalemate on structural reforms in the lead up to ANC leadership elections will continue to weigh on already weak business confidence and hamper government’s fiscal consolidation efforts.

In a research report published on Thursday, Moody’s senior analyst Zuzana Brixiova, who is also the lead sovereign analyst for South Africa, said government is under pressure to increase public spending in response to rising poverty levels – this in an environment where fiscal consolidation is already constrained by revenue under-collection and financially weak state-owned enterprises.

South Africa currently has a sovereign credit rating of Baa3 from Moody’s – one notch above junk status – after a downgrade in June this year. Moody’s next credit assessment is expected to take place in November this year.

Rising poverty and unemployment

In its research report, Moody’s cites the most recent poverty data from Statistics South Africa that has shown one in four South Africans (25.2% of population) live in extreme poverty as of 2015, up from approximately one in five (21.4% of population) in 2011.

The depth (or severity) of poverty has also risen over the same period to 9% of the poverty line, from 6.8%.

Statistics South Africa’s announcement on poverty levels followed short on the heels of the quarterly labour force survey, showing that unemployment remained static at 27.7% for the second consecutive quarter - the highest level since the global financial crisis.

South Africa’s poverty, unemployment and inequality are higher than in most other emerging markets, Moody’s notes, with 40% of the poorest households receiving only 8% of the country’s annual income.

Structural reforms unlikely in the run-up to ANC elective conference

Extreme poverty and unemployment eradication have been one of the foremost targets in the ruling party’s National Development Plan (NDP) and topping the ANC’s policy agenda.

The recent rise in poverty and unemployment levels have increased calls for a shift in social policy in the run-up to the ANC’s elective conference which will take place in Gauteng in December this year and South Africa’s general elections in 2019.

However, the ANC’s “radical economic transformation agenda” that received new impetus since the ruling party’s birthday celebrations in January 2017, includes several measures that could deter investment, Moody’s says.

This includes land redistribution and expropriation, preferential procurement and other forms of affirmative actions in employment, ownership and skills development. Some proposals, such as the recently drafted mining charter, present risks to growth by reducing regulatory stability and further undermining investor confidence.

Moreover, in the run up to the elections the commitment to difficult (and hence less popular) reforms aimed at promoting growth and consolidating government finances has been weakening, such as the much talked about reform of state-owned enterprises which has stalled since 2012 when the report on the Presidential Review Committee on state-owned entities (SOEs) was issued.

The review, which was undertaken to balance efficiency and competitiveness objectives with utilising SOEs as a tool for development, has been facing implementation challenges due to, in part, the lack of clarity on which government committee is overseeing the SOE reforms.

“We expect that a continued stalemate on structural reforms in the lead up to ANC leadership elections will also continue to depress already weak business confidence, impeding any meaningful rebound from its current 32-year lows."

The SA Chamber of Commerce and Industry reported on Wednesday that business confidence in South Africa has plummeted to its lowest level in more than 30 years as political uncertainty, unemployment and dwindling trade weighed heavily. 

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