Policy reforms can’t come soon enough

Feb 23 2016 13:44
Lameez Omarjee
Rian le Roux, chief economist at Old Mutual Invest

Rian le Roux, chief economist at Old Mutual Investment Group. (Picture supplied)

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It could take South Africa up to a decade to recover from a further downgrade to junk status. This was according to chief executive officer of Old Mutual Emerging Markets, Ralph Mupita.

Speaking at an Old Mutual briefing, Mupita said growth enhancing policies would need to be in place to illustrate to ratings agencies that growth will indeed happen in the long term.

Prerequisites to avoid further downgrade are: government implementing policy “promises” made during the State of the Nation Address; that tax hikes should not deter growth; and fiscal tightening that targets spending, Rian le Roux, chief economist for Old Mutual Investment Group said at the same briefing.

Le Roux stressed that fiscal policy alone would not be enough to convince ratings agencies; fundamental reforms are needed to ensure that the economy could grow at a faster rate. A growth rate of less than 1% is expected for 2016 a far cry from government’s target of 5%, he said. 

The business sector has been engaging with government to find solutions for growth, and according to Mupita such solutions would include having the private sector step in to alleviate some of government’s pressures to provide social infrastructure services like education and healthcare.

He also suggested the removal of state-owned enterprises, through privatisation, which would allow government to direct finances and resources to projects that support long-term growth.

Le Roux warned that SA should avoid another policy error, stating that the risk of another “accident” was large.

“There’s lots of fuel, we just need a match. And we got a match in December,” said Le Roux, referring to the Nenegate scandal.

“Government should be more rational about decisions and consider the net effect,” he added.

With SA currently on a fast track to a crisis, government should commit to more market-friendly and predictable policies, sound governance and democratic principles, and a harder line on corruption and wasted expenditure, according to Le Roux.

Budget preview

Le Roux said finance minister Pravin Gordhan’s budget will have to focus on generating economic growth and preventing a downgrade. This means prioritising the reduction of the current account deficit by cutting spending and raising taxes.

With slow economic growth, tax revenue collections are negatively impacted as consumers are pressured, he warned. This meant tax rates will be raised to compensate for the poor revenue collections. Tax revenue worth R22bn needs to be raised to meet revenue targets, Le Roux said.

According to Old Mutual, a VAT hike of 1% could increase tax revenue by more than R20bn. Other options available to finance minister Pravin Gordhan are:

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