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SA tripped up by slow govt reform action - economist

Cape Town - The SA government's reform agenda does not seem to be moving with sufficient speed within the context of wider political uncertainty, according to emerging markets economist Peter Attard Montalto.

The status quo expected from December’s elective conference, as well as a lack of new policy to drive reforms from the ANC’s policy conference this month indicates to him further downgrades to come.

"We believe S&P may further downgrade at the end of this year after the mini budget, possibly taking local ratings into junk territory. We believe Moody’s will downgrade into junk at the earliest after the budget next year," Montalto said on Tuesday.

"Both would move in our view on a too slow pace of reform, continued political and policy uncertainty and downgrade revisions to growth. For us, the key measure of reforms has been something that could potentially move the medium run potential growth dial. We do not see that at present."

He said if private sector investments weren’t happening in the first quarter before the Cabinet reshuffle and against a supposed backdrop of reform, then they are unlikely to happen after the reshuffle in the second quarter and beyond.

In his view, the performance of the SA economy as reflected in data for the first quarter of 2017 should be seen against the backdrop of "supposed reforms" that were ongoing in 2016 after Nenegate and the government’s nine-point plan as well as the reaffirmation of the National Development Plan (NDP) through to its supposed implementation of Operation Phakisa.

"While positive steps have been taken, it’s clear that political uncertainty has outweighed any position positives from such reform measures. Private investors and consumers are simply not supporting growth in the current environment, despite a positive global backdrop with supportive terms of trade," he explained.
 
"This is especially important after the recent downgrade by Moody’s and the subsequent ‘request’ by the National Treasury and the ANC that their ‘partners’ in the private sector start investing."

READ: New land reform bill unconstitutional - FMF

Too much confusion

In Montalto's view, there is often too much confusion about what is actually going on in terms of reforms. He pointed out that there is a key difference between "stabilisation measures" and "structural reforms". The former caps some downside risks and factors dragging on growth, but does not provide upside momentum to growth. The latter actually raises medium-run potential growth and provides momentum.

He explained that stabilisation measures could help sentiment to a degree, but not as much as structural reforms, because stabilisation measures will always be subject to a wider set of limiting factors.

That is why he believes measures taken in 2016 were really stabilisation measures.

These were mainly on:

- Changes to the strike balloting, which have not been tested yet;

- The Mineral and Petroleum Resources Development Act (MPRDA) amendments, which still haven’t been finalised and even then, in his view, will not release growth in the sector given ministerial discretion and industry concerns about the leadership at the Department of Mineral Resources and other regulatory issues in the sector contained in the ongoing Mining Charter Review;

- Greater cooperation between business and government, which in his view, did not help first quarter GDP, and has subsequently "fallen apart after the reshuffle with a loss of trust by business".

Montalto also looks at the proposed reforms now put forward by the government to avert further downgrades.

READ: ANC infighting limits much-needed economic reforms - study

Stabilisation measures:

SOEs

Proposed reforms of state-owned enterprises (SOEs) include endorsed private-sector participation; an adopted guideline for the remuneration and incentive standards for directors of SOEs; approved broad thrust of a guide for the appointment of boards and executive officers; recommended further consultation on the first draft of a new government shareholder policy; and the proposal to determine and cost the developmental mandates of SOEs.

In Montalto's view, these are positive, but with a lack of effective oversight from the Department of Public Enterprises (DPE) and the government more broadly he does not see any movement of the dial at the major SOEs.

In his view, SAA has been stabilised, but he added that the board is yet to meaningfully turn the airline’s direction of travel and more generally he sees a lack of resolution on "capture" concerns, particularly at Eskom.

FICA bill

Montalto regards the presidential signature for the FICA bill as positive, but points out that it still has to be Gazetted and then actually implemented.

Reforms

NDP and nine-point plan

Montalto said concerns remain about the NDP and the nine-point plan. In his opinion it is too unstructured a document, with a lack of wider buy-in from government or scalability of interventions.

The Mining Charter

Montalto remains concerned that this will actually increase the burden on the mining sector, especially with the current leadership at the Department of Mineral Resources (DMR). That is why he regards any removal of uncertainty in this regard not as a positive.

Broadband spectrum
 
Although Montalto sees the broadband spectrum as a positive, but can’t see how this increases potential growth.

Integrated Energy Plan

The revised draft of the Integrated Energy Plan and the base case and assumptions of the Integrated Resource Plan are viewed by Montalto as positive given it will be rewritten now to include a clearer path towards nuclear energy.

Labour Relations Act

Amendments to the Labour Relations Act would be positive, in his view, but does not do much to cut the cost of the administrative burden or reduce the cost of hiring and firing, which, he pointed out, are the key impediments in the labour market.

Montalto pointed out that there are also new risks seen on land reform and expropriation land valuations legislation.

Other stabilisation measures such as the resolution of the state capture issue through a proper judicial inquiry with arrests and charges as appropriate are also not occurring on a timely basis, in his view.

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