25/9/2018/Fitch Ratings
South Africa’s latest economic plan is unlikely to deliver a significant boost to economic growth, Fitch Ratings says. Several of the measures relate to existing proposals and others will take time to finalise and to have an impact. The announcement does not affect our recently updated growth forecasts.
President Cyril Ramaphosa last week announced an economic stimulus and recovery plan encompassing growth-enhancing reforms, reprioritising public spending to create jobs, setting up an infrastructure fund, improving education and health, and investing in municipal social infrastructure. The plan is partly a response to a technical recession in 1H18, but South Africa has also been affected by broader emerging market volatility.
The plan does include measures that could support growth, but many relate to long-standing policy ideas that have been slow to implement. For example, the approval of the revised Mining Charter was widely anticipated, but its likely impact remains unclear. The decision not to proceed with the Mineral and Petroleum Resources Development Act Amendment Bill had already been announced and replacement legislation will take time to draft. Radio spectrum auctions have also been delayed.
The plan envisages reprioritising about ZAR50 billion (USD3.5 billion) of spending within existing ceilings due to “limited fiscal space”. This could be modestly positive for growth as the measures targeted could have a greater multiplier effect, as could greater public-private infrastructure investment. But it is not clear how the planned infrastructure fund would operate and whether it will increase contingent liabilities to the government.
In our latest Global Economic Outlook, published on 21 September, we reduced our GDP growth forecasts for 2018 and 2019 to 0.7% and 2.1%, respectively, from 1.7% and 2.4%. The economy shrank in the first and second quarters of this year and the recovery, driven by a moderate strengthening of investment growth, will be modest.
The recent rand depreciation has complicated the policy reaction to low GDP growth. We think the depreciation primarily reflects the rand’s role as a proxy for emerging market currencies during times of broader emerging market risk aversion. But domestic factors including the recession and discussions about land reform have also contributed to outflows. The South African Reserve Bank (SARB) kept rates unchanged at 6.5% on 20 September, but three of the seven MPC members voted for a 25bp increase. This shows the independence of monetary policy and the SARB’s commitment to its price stability mandate.
Low trend growth is a persistent sovereign credit weakness for South Africa, reflected in the country’s rating of ‘BB+’/Stable. More details of the new plan will be announced in next month’s Medium Term Budget Policy Statement (MTBPS). Government revenue has held up well so far in 2018 despite economic contraction.
But balancing growth promotion, pressure to address exceptionally high inequality and fiscal consolidation priorities could be challenging if growth does not recover. With a general election due next year, the government may be less willing to offset any deficit overshoot. How fiscal policy evolves in response to weak growth will remain an important part of our sovereign rating assessment.