Cape Town - Political risk relating to the ANC’s succession struggle has become the top concern for ratings agency Fitch, which on Friday revised its outlook for the country from stable to negative, while keeping it one notch above the dreaded junk status.
It said political risks to standards of governance and policy-making had increased and “will remain high at least until the electoral conference of the ANC”.
This would hurt macroeconomic performance.
It said infighting in the government and the ANC - for which Finance Minister Pravin Gordhan has become a lightning rod - would continue, distracting policy-makers and leading to “mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth”.
Fitch said former public protector Thuli Madonsela’s report on state capture had highlighted “allegations of influence peddling and improper procurement practices involving close allies of the president”.
The report also underlined the risks to state-owned enterprise governance, Fitch said, noting the resignation of Eskom chief executive Brian Molefe.
It said debt of state-owned enterprises (SOEs) remained an important contingent liability to the state, amounting to R743 billion (18.2 percent of GDP) at the end of March, of which R280bn was subject to government guarantees.
Factional battles in the ANC could undermine government efforts to improve the governance of SOEs, Fitch said, referring to undertakings by Gordhan and President Jacob Zuma at the beginning of the year that this would be addressed as a matter of urgency.
While the cabinet has approved draft legislation to tighten processes for the appointment, removal and remuneration of executives and boards of public enterprises and to regulate private sector participation, the arm wrestling over the SAA board, which culminated in the return of Dudu Myeni as chair, has shown the process remains fraught.
Molefe’s resignation from Eskom following revelations in Madonsela”s report of his close relationship with the Guptas, as well as evidence of links between the family and the majority of board members, has raised uncertainty over the future.
In a separate development, Standard and Poor”s cut Eskom”s long-term corporate credit rating to BB from BB+, with a negative outlook.
On a positive note, Fitch said the release this week of the draft Integrated Resource Plan, in which nuclear procurement appears to have been deferred by at least 10 years, would ease concerns about any medium-term fiscal impact.
It said while the economy had begun to recover from “a series of shocks”, business confidence was still depressed and investment continued to contract. It projected GDP growth of 1.3 percent next year and 2.1 percent in 2018, saying Gordhan’s targets in his October medium-term budget policy statement now looked “only mildly optimistic”.
It saw the budget deficit shrinking to 2.8 percent of GDP in 2018/19, just 0.1 percent higher than Gordhan”s target.
While total general government debt (including municipal debt) would rise to 55 percent by March 2019 from 51.5 percent this year, the fact that 90.7 percent of it was denominated in local currency, with an average maturity of 14.6 years was “ highly favourable”.
The #FeesMustFall protests had shown how social pressures could lead to further spending pressures, but the fact that expenditure ceilings had not been breached since they were introduced in 2012 suggested such pressures had been well managed so far.
The Treasury said the fact the country’s investment grade status had been maintained “demonstrates the resilience of the country and its people, especially during difficult times, to achieve a common mission”.
“In this regard, government sincerely thanks all South Africans for their efforts in ensuring that the country does not lose its investment grade status and we urge all South Africans to continue this close working relationship with government over the period ahead.”
SA awaits the decision of ratings agency Moody's, while Standard and Poor’s is to announce its decision next week.
Political Bureau