ANC infighting limits much-needed economic reforms - study

Johannesburg - Battles inside the ruling African National Congress (ANC) ahead of its December elective conference are limiting South Africa’s ability to implement economic reforms.

This is according to a report by Fitch Group’s BMI Research on political risk strategy across the globe, in countries ranging from the US, the Netherlands and Russia.

More specifically, BMI Research gives South Africa one of the lowest ratings when it comes to its emerging market ‘EM reform tracker’.

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In this tracker, South Africa gets the second lowest rating of ‘4’, in which it only outranks the two lowest rated countries, South Korea and Turkey who each score ‘3’ respectively.

Countries such as Thailand, Russia and Brazil rank higher with a ‘5’ rating. Meanwhile, India, Mexico and Argentina have the highest reform rating of ‘7’, owing to their efforts to boost foreign investment, liberalise markets and enacting budget cuts.

For South Africa, the ANC’s December elective conference, which is seeing factions forming around front-runners Cyril Ramaphosa and Nkosazana Dlamini-Zuma to replace President Jacob Zuma as party head, is proving to be the country’s biggest risk to reforms.

“Infighting within the African National Congress (ANC) ahead of the 2017 National Elective Conference will limit scope for reform, though some measures could be passed as the country attempts to head off a downgrade of their long-term foreign currency debt,” said BMI Research in its note on the country.

“South Africa released its FY2017/18 budget targeting an additional R28bn in revenue increases and reducing the expenditure ceiling by an extra R10bn. While we believe the government will succeed in narrowing the deficit to a certain degree in the coming quarters, weak growth and elevated political challenges in the run-up to the December 2017 National Elective Conference will limit the extent of fiscal consolidation.

Despite the negative picture, South Africa is enacting reforms in some key areas, said BMI Research.

The first is in the power sector where new generation capacity is expected to “come online in 2017/18”, said BMI Research.

South Africa is also making some progress with labour market reform where the ruling ANC managed to recently strike a deal on a minimum wage of R3 500.

BMI Research also said that among government reforms include “plans to introduce legislation which will limit the number and severity of strikes”. Meanwhile, the research body said that while “government has acknowledged the need to improve governance and efficiency of SOEs”, little progress is being made in this regard.

Finally, BMI Research said that while fiscal consolidation measures have been passed, there still remains questions over their implementation in the “current environment”.

Global risks

Outside of South Africa, several global political risks persist, according to BMI Research.

The body said that apart from Donald Trump's protectionist policies, Dutch and French elections as well as inter-Korean tensions will dominate risk perceptions in the coming months.

“Immediately on our radar are the Dutch elections on March 15, where we expect a centrist coalition to emerge, keeping Geert Wilders' eurosceptic Party for Freedom (PVV) out of government,” said BMI Research.

“A stronger than expected showing for his party would once again raise questions over whether opinion polls are underestimating anti-establishment parties. This would naturally increase nervousness about a possible victory by Front National (FN) candidate Marine Le Pen in France's April-May presidential elections.

“Across the channel, the UK's ongoing march towards a 'hard Brexit' has raised the spectre of a second Scottish independence referendum. This reinforces our view that the undercurrent of scepticism towards political unity across Europe is unlikely to end any time soon. This will renew short-term pressure on sterling (against USD) and supports our expectation of continued US bond outperformance versus the eurozone,” said BMI Research.