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Goldman Sachs increasingly optimistic about SA

May 11 2018 11:31
Tehillah Niselow

Johannesburg - Goldman Sachs Group could raise its already positive outlook for South Africa’s Gross Domestic Product (GDP) growth in 2018.

The investment bank said in a research report on Thursday that while market participants welcomed the recent change in political leadership, they have been concerned about the implementation of the promised structural reforms and the market has not yet priced them in.

Goldman Sachs in January called SA “the big emerging market story of 2018” and predicted economic growth of 2.4%, higher than Treasury’s and the International Monterrey Fund’s  forecast of 1.5% and the World Bank  of 1.4%.

In Thursday’s report  titled Economic Analysis of Cyril Ramaphosa’s ‘New Deal’ for South Africa it expects the  “risks tilted to the upside”.

Goldman economist Andrew Matheny said that four key areas warrant monitoring for indications of reform progress in the coming months; the mining sector, land reform, state owned enterprise (SOE) policy, especially Eskom and public sector negotiations

“The key test, in our view, will be if the ‘New Deal’ policies that are more structural and fundamental are enacted, now that market pressure has decreased”.

Mining sector

Minister of Mineral Resources Gwede Mantashe has committed to concluding negotiations for Mining Charter III by the end of May.

“This is likely to specify targets for black ownership, lay out a clear framework for licencing and taxation, and resolve policy uncertainty”, writes Matheny.

However he warned “that clarification of the mining charter is unlikely on its own to resolve uncertainties entirely” and legal uncertainties could continue to be challenged in court

Mantashe recently announced that the department of mineral resources will appeal the ‘once empowered , always empowered’ declaratory order by the High Court, which will see allow mining companies to only ensure they have a 26% black stake once off once and if the black shareholders choose to sell, the mining firm is absolved of further responsibility.

Land reform

Goldman Sachs says if land reform is “addressed pragmatically and in ways that work to dismantle the negative spatial legacies of apartheid”, it could contribute positively to economic activity.

A message which Ramaphosa has been stressing when faced by questions from international investors and local business.

“The public debate around land-related issues also largely centres on agricultural land, while in the view of many experts the most pressing policy challenges are in urban areas”, Matheny commented.

The bank expects the Ramaphosa administration will clarify the conditions under which it foresees pursuing land expropriations.

The joint constitutional review committee will undertake submissions and public hear8ings before reporting back to parliaments on possible changes to land ownership, mid-September.

Parastatal policy

According to Goldman Sachs government’s backing of SOE loans represent the “greatest threat” to South Africa’s fiscal position

“Eskom faces cost pressures, a revenue shortfall, short-term liquidity needs and longer-term solvency concerns. With debt (including government guarantees) amounting to 8 to 9% of GDP, this clearly raises fiscal concerns”, writes Matheny.

Goldman Sachs expects some degree of asset unbundling and private sector participation in Eskom and other SOE’s in the future with announcements to this effect in the next few months.

Public wage negotiations

The public sector wage negotiations which have dragging on for over seven months are being seen by Goldman Sachs as “the most challenging issue in the current pipeline” in SA.

The New York headquartered bank believes that the market has already priced in an increase announced in the February budget speech of around 2%, approximately two percentage points higher than inflation.

“If this outcome transpires, on many counts from a fiscal perspective it would be somewhat disappointing”.

Goldman Sachs says that the issue is important because the public wage bill is the single largest expenditure item and can be seen as bloated considering the above inflation increases in recent years

The issue is also symbolic as Ramaphosa is supported by the largest union federation, the Congress of South African Trade Unions and the way that the government remunerations is handled is being seen as a litmus test for his “ability and willingness to undertake difficult structural reforms”.

Meanwhile, on the day that the Goldman Sachs’ positive report was released, data by Statics South Africa showed that key industries, mining and manufacturing contracted in the first quarter of 2018, which does not bode well for GDP growth in the first three months of the year.

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