ANC dithering on Treasury’s economic plan may well lead to a Moody’s downgrade
BUSINESS MAVERICK / 03 SEPTEMBER 2019 - 15.01 / NAZMEERA MOOLA
If instead, the ruling party seems likely to achieve buy-in for the central pillars by the time of the October Medium-Term Budget Policy statement, then the rating agency may hold off.
Last week the National Treasury released a discussion document entitled Towards an Economic Strategy for SA. Not surprisingly, in the week that followed, every special-interest group that would be affected – most notably the unions and Telkom – rubbished the paper.
A week later, the ANC released a statement saying the document would be tabled at the next meeting of the National Executive Committee (NEC) for discussion and it would consider all inputs from alliance partners, civil society and the business community.
The problem is that while the critics decry the plan, they do not offer plausible plans to boost South Africa’s growth. Unions want to prevent private sector participation in infrastructure provision and Telkom doesn’t want to lose any of the privileges of being an incumbent owner of infrastructure. Both are playing defence, not offence.
The National Treasury document hasn’t announced any grand new plans – rather, it has pulled together a number of plans that have appeared elsewhere. Importantly, it has focused on the micro reforms required, instead of sticking to the macro framework. Progress on the micro initiatives is key to delivering the 2.3 percentage point per year increase in SA potential growth that the document claims is possible over the next 10 years.
Some plans need to be revised, but, in general, the solutions proposed are very sensible. For example, infrastructure is a key constraint South Africa faces. Ten years ago, the government had both the cash flow and room to borrow to fund infrastructure provision centrally.
A decade of rampant corruption and mismanagement by the Zuma government has left resources far more constrained. The government has neither the capital nor the expertise to fund and provide infrastructure. Therefore, the Treasury plan reaches the rational conclusion that increased private sector participation is required to deliver the infrastructure required across the key network industries, notably energy, transport, telecoms and water.
In the energy sector, the Treasury outlines a plan to create an independent transmission company that would be agnostic on buying power from Eskom, an independent power producer (IPP) or a household. They would look to buy electricity as required by the demand and at the cheapest price. This seems like a good idea given the massive divergence in outcomes between the private sector-built renewable generating capacity and Eskom’s disastrous mega-builds, Medupi and Kusile.
In the telecoms space, it proposes relying on the private sector to provide broad-based broadband roll-out. Since South Africa’s broadband network lags well behind other emerging markets, this is certainly attractive. It also proposes compelling Telkom to share its legacy infrastructure more broadly.
It seems likely that if implemented these proposals would increase competition and efficiency. They would also deal with the government’s financial constraints, as funding would come from the private sector. The rise in investment spending on infrastructure together with the boost to confidence would provide some of the quickest gains in terms of improved growth.
Unfortunately, the largest opposition from unions will also be focused here.
The other measures are less controversial – but vital to move on. They require diligence and implementation in areas like reducing regulation for small business, supporting the agriculture and tourism sectors, introducing flexible industrial policy and promoting South African exports abroad. The main obstacle in these areas would be the lack of capacity to implement in the South African state.
In order to retain South Africa’s remaining investment-grade rating from Moody’s, two things are required: a higher growth rate and a plan for Eskom’s debt. The National Treasury’s plan explicitly seeks to deal with the former – by boosting growth in both the short term and the medium term. It also aims to implicitly deal with the latter by outlining a viable vision for a sustainable electricity sector that will no longer be able to hold South Africa to ransom.
Unfortunately, given South Africa’s long history of developing perfectly sensible economic plans that it then proceeds to ignore (remember the National Development Plan?), there is little expectation of any serious implementation of these proposals. Firms decisions and steps will need to be taken to overcome that doubt.
If the ANC spends the next six months discussing the plan – as the recent press statement suggests – then Moody’s is very likely to move the sovereign outlook to negative in November. If instead, the ruling party seems likely to achieve buy-in for the central pillars by the time of the October Medium-Term Budget Policy statement, then Moody’s may well hold off. The question is whether President Cyril Ramaphosa is able to follow up on the solid work he has done in rebuilding key institutions by implementing an economic plan that can raise the growth rate.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER