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Reform of state owned enterprises key to avoid downgrades - economists

Jun 08 2016 21:15
Carin Smith

Cape Town - Reform of state owned enterprises (SOEs) is crucial for South Africa in terms of future decisions by ratings agency Standard and Poor's (S&P), Arthur Kamp, investment economist at Sanlam Investments, told Fin24 on Wednesday.

This is considering government guarantees on state owned companies’ debt.

In part, kick-starting a higher growth rate depends on efficiently functioning SOEs, said Kamp. This is because SOEs provide the infrastructure without which economic expansion is constrained.

"Other, well documented reforms, which have been mooted, relate to the labour market, immigration policies and visa requirements for foreign nationals," said Kamp.

"SA has a very short timeframe to implement these reforms and lift business confidence, let alone translate any increase in confidence into fixed investment activity. In the absence of meaningful signs of implementation of Government’s strategy in the next six months, the risk of a downgrade lingers."

He pointed out that many commentators expected S&P to affirm SA’s long term foreign and local currency bond ratings at BBB- and BBB+ respectively last Friday. But the more critical point, according to Kamp, is that S&P maintained its negative outlook, implying it still expects to downgrade SA’s credit rating if prevailing trends persist.

"The problem is growth or, rather, the absence of meaningful growth. Growth in real GDP per capita - a measure of living standards - has stagnated and the unemployment rate remains depressingly high. The economy is likely to produce very little, if any growth in 2016," said Kamp.

"Meanwhile, medium term prospects constrained by poor productivity levels, weak terms of trade and depressed business confidence levels. In the absence of stronger income growth revenue shortfalls appear inevitable at some point, implying higher tax rates - or the introduction of new taxes."

READ: SA must heed Fitch's reform opportunity - Treasury

The National Treasury’s 2016 Budget Review outlines the turnaround strategy for state owned enterprises. Key elements of this strategy include stabilisation of financial and operational performance, rationalisation where overlapping mandates exist and the introduction of a framework for good governance, covering the appointment of board members, while aligning remuneration with performance, Kamp explained.

In his view Fitch and S&P are giving SA time to show the proposed programme to reform or look at reforms of SOEs and the economy broadly could make them more optimistic about SA's long term growth.

"We have to show we can grow the economy. The plans proposed make inherent sense and they could make a significant difference to SA's long term growth if implemented," said Kamp. "If not, the risk of a downgrade could be high."

According to Sanisha Packirisamy, economist of MMI Investments and Savings, the three key rating agencies Moody’s, S&P and Fitch have all acknowledged Treasury’s commitment to sticking to the expenditure ceiling and stabilising the debt ratio.

"Though political risk has risen over recent months, the rating agencies have reiterated the strength of SA’s institutions in a tough economic climate. Nevertheless, they admit to rising fiscal risks against the backdrop of low growth," she explained.

READ: DA warns of zero growth trap for SA

She too emphasised the necessary implementation of growth-enhancing reforms has been reiterated by all three rating agencies as a way to positively influence SA’s longer-term trend growth through securing a healthier investment climate and enhancing relative competitiveness.

MMI's internal growth forecasts of around 0.5% this year and slightly above 1% in 2017 suggest that revenue collection could come under significant strain particularly in the absence of additional tax proposals.

"With government’s burgeoning civil servant wage bill and onerous debt-servicing costs crowding out more useful forms of expenditure, the outlook for government fixed investment spend and overall growth remains at risk," she said.  

In MMI's view, higher rates of economic growth can be cultivated by implementing key reforms in the labour and mining sector in particular. Addressing the challenges that face vital state-owned enterprises are also key in unlocking a higher growth potential in SA.

"Nevertheless, rising political tensions in a low-growth environment raises the risk of buckling under socialist demands and endorsing policy measures that could damage SA’s investment climate, posing a significant threat to SA’s sovereign rating outlook," she added.

"We continue to see a more-than-even chance of a rating downgrade to junk status by at least one of the three rating agencies (namely S&P) in December this year, with a high probability attached to Fitch shifting their outlook to negative around the same time."  

ALSO READ: Junk reprieve strengthens rand after GDP news hurts currency

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