Capital Markets Corporate

August 7, 2019

President Ramaphosa to Demonstrate Decisive Leadership to Stave off IMF Imposition

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On Friday the 26th of July, the Fitch Rating agency downgraded South Africa’s economic outlook from stable to negative, also keeping South Africa’s long-term foreign and local currency debt on BB+ (sub-investment grade).  Fitch cited South Africa’s increasing budget deficit, continued support of SOEs, and the low economic growth for the revised outlook.

South Africa has been hamstrung by several challenges in recent years, from state capture allegations, policy uncertainty,  a weakening rand and a stubbornly high unemployment rate. Furthermore, of big concern has been governments indecision on critical policy issues such as the nationalisation of the reserve bank as well as the controversial land reform debate.

In view of this, all eyes are on Moody’s, which is expected to provide its revised investment outlook for South Africa in November. As the only rating agency that still has South Africa at an investment grade, Moody’s is now under pressure to release its investment outlook and align themselves with Fitch and Standard & Poor’s.

A prevalent sentiment is that SA being downgraded to junk status might be good for the country as it will allow the International Monetary Fund (IMF) to step in and save the country from the internal politics of the African Nation Congress. The view is that the IMF will make the hard decisions that the current government is unable to, such as shrinking the government wage bill and the privatisation of SOEs

Scenario 1: International Monetary Fund Saves the Day
If South Africa is downgraded by Moody’s, accessing capital for government programmes in debt markets would be significantly more expensive. This would prompt the SA government to call on the IMF for assistance in making up the shortfall. The IMF is known for its Structural Adjustment Programmes, which have a number of conditions which include privatisation and the liberalisation of the economy. Those in favour of the IMF’s intervention solely base it on the institution’s ability to make difficult decisions required to kickstart economic growth.

Under this scenario, the IMF could actually create a conducive environment for businesses to grow. Putting the interests of the economy first and not succumbing to political pressure from unions and other institutions.

Scenario 2: IMF Intervention Causes more Harm than Good
Under this scenario, one can draw from the negative impact that the IMF conditions or recommendations might come with, drawing lessons from and not limited to the likes of Zambia, Malawi and Zimbabwe. In many instances the conditions imposed on African countries by the IMF have worsened economic conditions in the respective countries, exacerbating the levels of poverty, largely impacting the poor who depend on subsidised support for social services such as medical care and social grants which the IMF vehemently rejects.

The IMF’s structural adjustment programme may give little to no space for SA’s social welfare programmes which millions of South Africans are dependent on for their livelihoods. This could be detrimental to the South African economy, given its unique challenges, inequality issues and historical background.

Best Case Scenario: President Ramaphosa Shows Decisive Leadership
Our third and final scenario is one in which the President takes charge and moves away from leading through commissions. Here, President Ramaphosa would need to make good on some of the many promises made thus far, such as the prosecution of those implicated in state capture, provide policy certainty on the mandate of Reserve Bank and the restructuring of non-performing SOEs as well as make a final decision on the land question.

Conclusion
In our analysis, President Ramaphosa is currently South Africa’s best hope of turning the tide on poverty and ushering in an era of economic growth. However, forces within his own party are actively working to undermine his efforts. Rapmahosa will need to show decisive leadership in the coming months if we are to stand any chance of avoiding an investment downgrade.  Key to this, however, will require taking the hard steps now before they are imposed on us.

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