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Azar Jammine: Gigaba’s 14-point plan another empty suit for SA economy

July 14, 2017 10:19 AM
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Enterprises (SOEs) and inducing greater policy certainty and improving business confidence. The measures clearly do not focus on longer-term structural impediments to growth that are intended to ensure that short-term growth exceeds 1%.

The problem with any such attempt in the current business environment is that it is difficult to see how business confidence can be boosted meaningfully and policy certainty generated under the present leadership of the country. Until such time as there is confidence that the challenge of State Capture will be conclusively addressed, it is difficult to see economic growth in the longer term rising much above the 1% level.

It is clear that the government has taken fright from the analysis that suggests that the economy could face a worst-case scenario of entrenched recession in the event that there are further credit ratings downgrades. Especially in the case of S&P and Moody’s, if their current investment grade rating on local currency bonds is reduced further, then such bonds would have to fall out of the World Government Bond Index (WGBI) and other similar bond indices, compelling tracker funds which try to track the WGBI with their asset allocation to sell-out of South African government bonds, generating huge capital outflows of the order of R100bn to R200bn.

The resultant collapse in the Rand would generate renewed inflationary pressures, possibly forcing an increase in interest rates, leading to sharply lower economic growth and investment. In order to avoid such a scenario materialising, it is therefore important for the government to announce some kind of action to preempt that situation. The new GIGAP just announced appears to try to address the issue. It begins with setting out four objectives. Apparently, these objectives are aimed at addressing concerns raised by various stakeholders in engagements conducted by National Treasury, presumably with other government departments, trade unions, SOEs and private sector interests.

Firstly, the intention can be interpreted as doing something about improving the short-term growth rate as a means of enhancing the “fiscal framework”. This can be interpreted to mean inducing higher growth in order to raise growth in government revenues as a means of making it easier to bring down the budget deficit and in so doing to prevent the public debt from increasing further. Addressing the rising trend of public debt is in itself the second concern that the GIGAP seeks to address.

Finally, the GIGAP seeks to induce policy certainty as a means of addressing low business and consumer confidence. Without doubt, the first three prerequisites encapsulate the essence of the concerns raised by ratings agencies over the past two years with regard to the performance of the South African economy. To that extent, one cannot fault the attempt by Treasury in setting out its intention to make inroads into these issues.

Besides the contents and principal objectives of the GIGAP in terms of the broad solutions aimed at appeasing credit ratings agencies, one also gains the impression that the Plan has been introduced with a time horizon influence in mind. The government has set out a broad set of policy actions and timelines for such actions, with the added inference that it intends to concretise many of these action plans in the Medium-Term Budget Policy Statement (MTBPS) due to be released in late October.

The intention clearly is to have a set of plans outlined by the end of October ahead of the next credit ratings reviews which take place on November 24th in the case of S&P and Moody’s according to their current planning. If such positive intentions are laid out in the MTBPS and in November and the ratings agencies are also aware of the impending electoral conference for a new president in December, this will make it very difficult for the agencies to downgrade the country’s credit rating on its local currency debt to junk status just then.

Any action in regard to further downgrades would then have to wait until well into 2018, by which time there could be a new leadership in place which imbues the overall investment environment with much more confidence. From a short-term time horizon point of view it is also difficult to see ratings agencies being able to judge the success or otherwise of the implementation of the GIGAP.

In other words, it will only be well into 2018 that one will be able to say conclusively whether some of the measures introduced in the Plan have been implemented or not.


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