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Cabinet reshuffle threatens fiscal consolidation - research

Apr 20 2017 18:44
Lameez Omarjee

Johannesburg – Having an ally of President Jacob Zuma, Finance Minister Malusi Gigaba, in National Treasury may undo efforts towards fiscal consolidation and other improvements in state-owned enterprises (SOEs), research revealed on Thursday.

BMI Research, part of the Fitch Group Company, released research which looked at the impact of the Cabinet reshuffle on South Africa's economic outlook. The reshuffle, which took place in March, saw the president replacing former finance minister Pravin Gordhan with Gigaba.

This subsequently led to downgrades to junk status by ratings agencies Standard & Poor’s and Fitch. Moody’s, which has South Africa rated two notches above junk status at Baa2 with a negative outlook, has placed the country on review for a downgrade.

The ratings agencies raised concerns over the policy direction of the country, given the change in executive leadership. Gigaba is at the International Monetary Fund/World Bank Spring Meeting in the US, in an attempt to reassure investors and Moody’s that the country is not changing its policy direction.

READ: Gigaba in last-ditch bid to sway Moody's on downgrade call

At a briefing on Thursday, Gigaba explained that he would continue on a path towards fiscal consolidation. However, BMI Research indicates that fiscal consolidation is no longer a priority.

There is increased potential for short-term fiscal slippage, but the biggest threats remain for the long term, research showed. “Government may take [a] softer stance in public sector wage negotiations, [a] new agreement [is] due in 2018,” the report read.   

There are also concerns that Treasury is less likely to place stringent conditions on SOE guarantees, which would increase the state’s contingent liabilities.

Further, the replacement of the finance, energy and public affairs ministers also poses a risk that the nuclear build project will be fast-tracked.

Gigaba however has said numerous times that a nuclear programme would be implemented at a scale and pace government can afford.

ALSO READ: Nuclear still on track, despite S&P warning on Eskom

The downgrade has not deterred the state’s plans for a nuclear build programme. Eskom wants a nuclear plant up and running by 2025.

There is also a threat that the local currency debt may be downgraded. This will see South Africa removed from the World Government Bond Index and increase borrowing costs further.

The downgrade of foreign currency debt to sub-investment grade has placed SOEs at risk, as 40% of their debt is foreign currency-dominated, according to research. 

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