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Still possible to turn economy around

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The chances of South Africa’s economic and political prospects turning around are rising, but this is still not guaranteed and will not be a smooth path.
This is according to Old Mutual Emerging Markets CEO, Ralph Mupita, and Old Mutual Investment Group chief economist, Rian le Roux, who say that with the upcoming Budget from recently reappointed Finance Minister Pravin Gordhan attracting critical attention from global sovereign ratings agencies, more collaboration is required between government and business to help turn this rising hope into progress.
Speaking at OMIG’s first quarterly Investment Briefing for the year, Le Roux says that unless South Africa finds the means to reform, it will be facing an even worse crisis than it currently finds itself in.
“While the country is still adjusting to the macro-economic implications of the changes in Finance Ministers during December, we are seeing some positive indicators coming through. The President’s State of the Nation address focused more specifically on the economy this year, but practical follow-through is still needed to be impactful,” he says. “Government and business are also finally starting to engage more constructively, which is encouraging.”
A ratings downgrade remains a threat for the country, and while all eyes are on the Budget, Le Roux believes it is about more than just the fiscal situation.
In addition to fiscal consolidation, which he lists as a key consideration in improving South Africa’s economic prospects, Le Roux outlines a number of critical actions that need to happen if the country is to move forward from its current challenges.
“First and foremost, government needs to admit that South Africa is in a crisis, which we have finally seen happen over the last few weeks,” he explains. “The next step is to see government’s commitment to more market-friendly and predictable policies, sound governance and democratic principles, as well a harder line on corruption and wasted expenditure.
“The functioning of state-owned enterprises and local authorities also needs attention as does a maintained transformation focus and the avoidance of any more policy blunders,” says Le Roux.
Most importantly, he believes that there should be a solid compact between government, business and labour. “While we have seen more collaboration between business and President Zuma’s government than ever before, there is still no representation from labour in these discussions.”
Mupita, who has played an active role in the recent engagement between South Africa’s leading CEOs and government, points to the recent drafting and consideration by government of an eight-point plan that would, if implemented, help to prevent a damaging sovereign ratings downgrade.
“South Africa’s business and political leadership has a window here to act decisively and quickly in order to get the economy back on a sustainable and inclusive growth path,” he says. “What has been particularly encouraging is the strong consensus between government and business on the urgency and direction of the actions that need to be taken, and there is a growing sense of willingness, on all sides, to collectively do whatever it takes to rebuild our reputation as a safe investment destination.”
Looking ahead, Le Roux believes that 2016 is going to be a difficult year from many perspectives. “We are hoping for a much-needed tighter Budget. We will most likely see two more 25 basis point rate hikes as inflation is likely to exit its target soon, but fiscal tightening would reduce the pressure on monetary policy,” he explains.
“In addition we are expecting weaker growth with about 0,5% for 2016 and 1% for 2017. We don’t expect a recession, but with the economy stalling, the risk is still ever present. However we do expect the current account deficit to narrow to around 3,5% of GDP, provided commodity prices hold, which is more than consensus expectations.”
Le Roux believes that a downgrade to junk status can be avoided provided that fiscal tightening targets, spending and tax hikes are not too growth damaging.
According to Mupita, the actions required to avoid a downgrade make allowance for fiscal tightening in combination with stimulating growth – particularly sustainable growth in the long term. “2016 will be a tough year for South Africa, however fiscal tightening alone will not prevent a downgrade, it will only postpone it – growth enhancing reforms are crucial and required to help prevent the long-term impact of a ratings downgrade on our country,” says Mupita.