Moody’s: Ramaphosa’s win raises prospect of an improvement in SA’s rating
The new ANC president’s narrow win could limit his ability to implement reforms
Credit-ratings agency Moody’s has given the new leadership of the ANC the thumbs-up and says it raises the prospect of an improvement in SA’s rating.
However, it warned that the narrow victory of newly elected ANC president Cyril Ramaphosa could limit his ability to implement promised reforms.
Moody’s rating review period started on November 24 and it is expected to run until after the announcement of the 2018 budget in February. The agency said on Tuesday that this period would allow it to assess the willingness and ability of the South African authorities to implement policies that will tackle the challenges facing the country.
Moody’s placed SA’s Baa3 rating on review for a downgrade in November shortly after S&P Global Ratings relegated the country to junk status.
It warned that Ramaphosa’s narrow victory would complicate reaching consensus on the necessary reforms.
The opposition faction of the ANC secured substantive representation among the top six ANC positions, namely the posts of deputy president (David Mabuza), secretary-general (Ace Magashule) and deputy secretary-general (Jesse Duarte).
Moody’s said Ramaphosa was perceived as more market-orientated than his defeated opponent, Nkosazana Dlamini-Zuma, and “opened up the tentative prospect of a shift in policy and a rise in business confidence that could reverse the gradual deterioration in SA’s credit fundamentals”.
In his campaign speeches, Ramaphosa articulated broad reform priorities that, if implemented, would begin to deal with weaknesses Moody’s identified in its assessment.
They include a balanced macroeconomic policy that promotes growth and maintains fiscal discipline and stabilises the debt trajectory; reforms to the governance of state-owned enterprises through appointment of credible boards and CEOs; strengthening of key state institutions such as law-enforcement authorities including through appointment of new leadership to combat corruption and state capture; improvements to public governance by reducing the size of the Cabinet and through appointments to key positions in the administration; implementation of the Mining Charter to promote investment in this key sector; and reform of education, with a particular focus on townships and rural areas.
Swift implementation of even a subset of reforms, particularly those on fiscal stability and state-owned enterprise governance, was likely to boost confidence, investment and growth.
“In some areas, a change of approach might be observed relatively quickly, in particular when measures intended to halt the gradual deterioration of SA’s fiscal profile are announced in the 2018 budget on February 21. However, most will take longer to deliver,” the agency said.
“Despite inherent economic and institutional strengths, SA faces significant structural challenges to productivity and growth, including a skills gap, infrastructure gap and barriers to competition. By their nature, such bottlenecks cannot be addressed quickly.”
It pointed to the existence of substantial political obstacles to a marked policy shift. It was unclear whether Ramaphosa would have the parliamentary support to implement such a shift. Jacob Zuma remained the president and given the narrow victory of Ramaphosa, Zuma was less likely to stand down to make way for him.
“The relatively strong representation of the opposition faction in the ANC leadership will [be likely to] complicate policy negotiations and could delay agreement on key reforms,” Moody’s said.
“In principle, the ANC president is mandated to implement the policies concluded during the ANC policy conference in July 2017. In practice, Ramaphosa’s narrow victory complicates reaching consensus and leaves room for delays.”
One clear area of tension was education. “While all recognise the need for reform to enhance human capital and reduce inequality, it remains to be seen how that will be achieved without further undermining already stretched public finances. The implementation of free higher education for poor and working-class students announced at the outset of the ANC conference could add up to 1% of GDP a year in the next three years and more in the outer years.”
The prospect of a new approach to any of these weaknesses in SA’s credit profile could boost business confidence, investment and growth.
“Already in the run-up to the ANC leadership [conference], financial markets have signalled optimism at the prospect of change. For example, the rand strengthened earlier in December following court rulings on ANC provincial and branch leadership structures that weakened the status quo position,” Moody’s said.