IMF, ratings agencies point to need for tough choices - Fin24

Terence Corrigan

Since his accession to the country's presidency in February last year, Cyril Ramaphosa's admirers have argued that his immediate options were limited by the need for a solid mandate.

Once he had secured this, he would have the necessary political capital to drive much-needed policy reform to get South African on track.

Now that President Cyril Ramaphosa has brought his party to a respectable win in the elections, and has constituted his Cabinet, expectations are that the time for action has arrived.

As if to underline this, the International Monetary Fund (IMF) has had some sobering things to say in the wake of a visit to South Africa.

Its message, expressed in the clipped, understated tones of professional economists, pointed to significant structural problems in the economy: "The fiscal deficit is set to worsen as weak growth constrains revenue, current expenditure remains rigid, and public enterprises require additional support."

Perfect storm

This is a combustible mix. The state is outspending itself – not least on propping up its badly-run state companies – while the indifferent performance of the economy precludes creating any more substantive volumes of resources to tap into.

This caution comes along with renewed focus on the country's credit ratings.

Already at so-called junk status with Fitch and S&P, South Africa was issued a veiled warning by Moody's last month that the country faced considerable challenges, which – left unattended – would come to overwhelm its still significant strengths.

Commented the agency: "In the absence of effective policy change, the sovereign's credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low.

"Fading prospects of policies that will sustain fiscal and economic strength, alongside any signs of diminishing resilience to shocks, would put downward pressure on the country's rating."

Junk status?

Moody's retains South Africa at a notch above junk status, and this is a stark warning that even this is in jeopardy.

S&P, meanwhile – having voiced some optimism in the wake of the election – recently sounded a more cautious note.

"The government will likely continue to shy away from difficult and contentious issues such as widespread staff retrenchments in SOEs and tackling the labour unions."

It continued: "Overall reform efforts are likely to be lacklustre and unlikely to be significant enough to drive strong GDP growth."

The consequences of all stand to be serious.

Broken SOEs

They are also tragic, since the problems that South Africa is confronting are not the consequences of a war or natural disaster, nor even (solely) of such reviled pathologies as corruption.

They are the predictable outcomes of policy decisions that defied economic sense, that elevated ideology over pragmatism and that created perverse incentives.

The country's dogged commitment to maintaining a suite of state-owned enterprises, charged with all manner of developmental responsibilities and overseen by people whose political credentials frequently trumped their business acumen (or the business acumen of their colleagues) is an obvious and glaring example.

There is no firm evidence that any game-changing lessons have been learned – the CEOs of South African Airways and Eskom have recently announced their resignations.

Meanwhile, the Secretary General of the African National Congress maintains that central to his party's mandate is to prevent privatisation – not that it was really ever on the table.

The land question

Meanwhile, expropriation without compensation has already proved to be a deterrent to investment. As economist Azar Jammine remarked to the Financial Mail in January, it destroyed whatever prospects may have existed for a 'Ramaphoria' windfall. (The cover of the issue in which these comments were carried bore the bold headline 'How Land Expropriation could Work in SA… without Destroying the Economy'. When a respected publication is offering ideas to manage a policy so that it does not in fact 'destroy the economy', it's a sign that the policy in question is a poor one.) Already there is evidence of reluctance to invest as a result of the policy proposals.

Economic modelling conducted by Dr Roelof Botha, who is affiliated with the Gordon Institute of Business Science; and Professor Ilse Botha of the University of Johannesburg, put the cost to GDP at hundreds of billions of rands annually in the short to medium term as a result of a fall-off of investment (their scenarios examined investment declines of 5% or 10%). Well over two million jobs could also be lost. State revenue would likely tumble, widening the fiscal deficit, which is already a cause for concern.

"This study confirms imminent socio-economic disaster for SA in the event of expropriation without compensation being pursued.

"It is clear from international evidence that a strategy aimed at land reform should be based on market principles and pragmatism, with a detailed and comprehensive land audit as starting point," the authors wrote.

The damage inflicted by EWC will not be limited to farms and agriculture.

Tough reforms needed

The ratings agencies and the IMF are, in this sense, merely adding their voices to what others have warned against, highlighting the specifics of the inevitable fallout if the current determination is maintained.

President Ramaphosa is in the presidential office, and has his mandate. He should also have heard the warnings. He must now make his choices.

Terence Corrigan is a project manager at the Institute of Race Relations.

https://www.fin24.com/Opinion/imf-ratings-agencies-point-to-need-for-tough-choices-20190604