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Market-friendly reforms critical for SA - UBS report

Sep 08 2017 05:00
Carin Smith

Cape Town - A return to a more market-friendly and transparent government structure is key for South Africa's medium-term outlook, according to a report by Swiss financial services company UBS.

More market-friendly policies are needed if SA wants to keep its economic potential from deteriorating further, it warns.

"We see the potential return to economic and structural reforms as an opportunity, but the likelihood thereof is limited at this point," UBS states in a new report on the continent's economic prospects and challenges.

"Investors and rating agencies will be closely watching the outcome of the ANC National Policy Conference in December... a more reform-oriented person (elected) might lead to a positive market reaction," it said in the report titled Africa – Cradle of Diversity.

UBS said it is keeping a cautious view on the rand ahead of the ANC leadership transition in mid-December 2017.

"In South Africa, reforms have almost come to a full standstill as the country struggles with the power vacuum created by succession planning within the ANC, widespread corruption and government inefficiencies," UBS states.

The report found that the well-established capital market with investable assets in all asset classes, the free-floating currency as well as the sound track record of the South African Reserve Bank (SARB) are among the country's strengths.

"SA is, however, in the midst of a power struggle and growth prospects are low. The IMF expects real economic growth of around 2% in coming years, but risks are skewed to the downside," states the UBS report.

"Credit ratings have been on a downward trend since 2012, when South Africa was still an A-rated country, and have recently reached a speculative grade rating by S&P."

Credit ratings

According to Michael Bolliger, head of emerging market asset allocation at UBS Wealth Management's Chief Investment Office, SA's deteriorating credit ratings have weighed on investment in the country in recent years.

"Reforms that enhance the country's fiscal position as well as stimulate its economy would send out a particularly positive signal to investors," he says.


The report found that SA's strengths include benefits from its position as one of the three largest economies in Africa, the relatively diversified economic structure, the developed domestic financial markets and well capitalised banks.

Other strengths include low foreign currency debt thanks to the availability of domestic funding, a sound macroeconomic framework supported by a free-floating exchange rate, a track record of sound fiscal management as well as independent institutions, such as the SARB.


According to the report, rising public contingent liabilities from mismanaged state-owned enterprises (SOEs), strikes in several industries and income inequality could undermine social stability.

UBS research identifies a return to a more market-friendly and transparent business environment as key for SA's medium-term outlook, which should be a priority for the government.

This could be expected to lead to a favourable market reaction if implemented, says UBS. Economic reform is particularly important given the structural slowdown in China, which consumes 10% of SA's exports.

On the business front the report points out that it takes 43 days to start a business in SA, relative to a median of 15 days for emerging markets.


Low growth potential due to structural bottlenecks, weakening governance, several corruption scandals and protracted political infighting that generate policy uncertainty impede structural reforms and discourage investment, the report cautions.

The elevated unemployment rate, the fast growth of the working-age population and low job creation furthermore increase the risk of social pressure and political radicalisation.

Rising government debt leaves little room for macroeconomic stimulus, while funding of current account deficit depends on portfolio inflows.


UBS believes more opportunities could arise if structural bottlenecks were addressed and reform momentum picked up, governance of SOEs improved and political uncertainty faded.

It concludes that a shift towards a more reform-orientated government could initiate a change in current market perceptions.

Countries in Africa that offer growth opportunities combine some level of potential consumers with disposable income, a reasonable level of infrastructure and a reasonable level of good governance. These include South Africa, according to the report.

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