Azar Jammine: Gigaba’s 14-point plan another empty suit for SA economy

JOHANNESBURG — A whole lot of hot air. That’s how many journalists, analysts and experts have described Finance Minister Malusi Gigaba’s so-called 14 point plan. It’s laughable that the plan has been extended from its previous nine points (nine points which President Jacob Zuma could not even bother to remember as exposed in Parliament some time back). I thought that what crisis comms expert Alan Hilburg told Alec Hogg in an interview published today is very interesting, especially in light of what Gigaba has just announced. That is, South Africa is experiencing a trust deficit crisis – our leadership can’t be trusted. Gigaba has Gupta written all over him and, as Azar Jammine highlights below, the elephant in the room in the ANC leadership of President Jacob Zuma. In a note published on Thursday, Nomura’s Peter Attard Montalto also said that Gigaba failed to pull ‘rabbit out of a hat’ with his 14-point plan. The best that Gigaba can realistically hope for is that his plan staves off more ratings downgrades, but he has failed to incite confidence around his ability to ensure long-term economic growth for the country. – Gareth van Zyl

By Azar Jammine*

Key points

The GIGAP announced yesterday by the Minister of Finance Malusi Gigaba cannot be faulted in terms of being a comprehensive attempt at boosting economic growth in the short term through government intervention which does not impair the country’s fiscal parameters.

Azar Jammine
Dr Azar Jammine is a leading South African economist.

The government is clearly trying to stave off further credit ratings downgrades by addressing the very factors that threaten to bring about such downgrades. These include boosting growth to generate higher tax revenues and associated with this, controlling the public debt, controlling the growth of contingent liabilities of State-Owned Enterprises (SOEs) and inducing greater policy certainty and improving business confidence. The measures clearly do not focus on longer-term structural impediments to growth that are intended to ensure that short-term growth exceeds 1%.

The problem with any such attempt in the current business environment is that it is difficult to see how business confidence can be boosted meaningfully and policy certainty generated under the present leadership of the country. Until such time as there is confidence that the challenge of State Capture will be conclusively addressed, it is difficult to see economic growth in the longer term rising much above the 1% level.

GIGAP aimed at staving off further credit ratings downgrades

It is clear that the government has taken fright from the analysis that suggests that the economy could face a worst-case scenario of entrenched recession in the event that there are further credit ratings downgrades. Especially in the case of S&P and Moody’s, if their current investment grade rating on local currency bonds is reduced further, then such bonds would have to fall out of the World Government Bond Index (WGBI) and other similar bond indices, compelling tracker funds which try to track the WGBI with their asset allocation to sell-out of South African government bonds, generating huge capital outflows of the order of R100bn to R200bn.

The resultant collapse in the Rand would generate renewed inflationary pressures, possibly forcing an increase in interest rates, leading to sharply lower economic growth and investment. In order to avoid such a scenario materialising, it is therefore important for the government to announce some kind of action to preempt that situation. The new GIGAP just announced appears to try to address the issue. It begins with setting out four objectives. Apparently, these objectives are aimed at addressing concerns raised by various stakeholders in engagements conducted by National Treasury, presumably with other government departments, trade unions, SOEs and private sector interests.

Malusi Gigaba, South Africa’s finance minister, gestures as he speaks during a news conference after presenting his first budget to parliament in Cape Town on May 23, 2017. Photographer: Halden Krog/Bloomberg

Firstly, the intention can be interpreted as doing something about improving the short-term growth rate as a means of enhancing the “fiscal framework”. This can be interpreted to mean inducing higher growth in order to raise growth in government revenues as a means of making it easier to bring down the budget deficit and in so doing to prevent the public debt from increasing further. Addressing the rising trend of public debt is in itself the second concern that the GIGAP seeks to address.

Thirdly, the government seeks to limit the risks posed by contingent liabilities of SOEs. This means improving the performance of SOEs so as to reduce the pressure on them to have to rely on government to bail them out at every turn because they cannot generate a self-sustaining growth path under the present dismal performance being achieved by them.

Finally, the GIGAP seeks to induce policy certainty as a means of addressing low business and consumer confidence. Without doubt, the first three prerequisites encapsulate the essence of the concerns raised by ratings agencies over the past two years with regard to the performance of the South African economy. To that extent, one cannot fault the attempt by Treasury in setting out its intention to make inroads into these issues.

Hope is clearly that MTBPS will also help to stave off ratings downgrades

Besides the contents and principal objectives of the GIGAP in terms of the broad solutions aimed at appeasing credit ratings agencies, one also gains the impression that the Plan has been introduced with a time horizon influence in mind. The government has set out a broad set of policy actions and timelines for such actions, with the added inference that it intends to concretise many of these action plans in the Medium-Term Budget Policy Statement (MTBPS) due to be released in late October.

The intention clearly is to have a set of plans outlined by the end of October ahead of the next credit ratings reviews which take place on November 24th in the case of S&P and Moody’s according to their current planning. If such positive intentions are laid out in the MTBPS and in November and the ratings agencies are also aware of the impending electoral conference for a new president in December, this will make it very difficult for the agencies to downgrade the country’s credit rating on its local currency debt to junk status just then.

Any action in regard to further downgrades would then have to wait until well into 2018, by which time there could be a new leadership in place which imbues the overall investment environment with much more confidence. From a short-term time horizon point of view it is also difficult to see ratings agencies being able to judge the success or otherwise of the implementation of the GIGAP.

In other words, it will only be well into 2018 that one will be able to say conclusively whether some of the measures introduced in the Plan have been implemented or not.

Examination of the statement released yesterday clearly illustrates that the intention was not to address fundamental structural reforms needed to uplift the country’s longer-term economic growth rate. Issues such as education and skills development, the need to break down the concentration of power in South African business, reduction of overregulation, encouragement of small business and entrepreneurship, improvement of relations between public and private sector and above all, in the context of recent confidence-sapping events, the need to address corruption and State capture, clearly do not form part of the GIGAP. The latter instead is focused primarily on ensuring that a multitude of short-term actions are invoked to ensure that the country’s economic growth rate exceeds 1% this year and next year and that the economy does not languish in recession. There is an encouraging acknowledgement that dismal economic growth impairs the ability to uplift the living standards of the broader society and the poor.

The problem is that even a 1% growth rate will do very little in terms of improving the lives of ordinary South Africans. On the contrary, such a dismal growth rate, even if not of recessionary proportions, is insufficient to make any inroads into the rising trend of unemployment. But one gains the impression that at least some growth will be seen as positive by ratings agencies rather than no growth at all. In turn, structural reforms require time to yield results. Within the context of the need to stave off credit ratings downgrades, there is clearly insufficient time available to address such constraints.

The elephant in the room is the current leadership

Unfortunately, the weak point of the GIGAP is the challenge of bringing about an improvement in business and consumer confidence so long as the current leadership of the country remains in place. Concerns about economic policy uncertainty overlap very much with the notion that the current leadership is still intent on introducing measures aimed at enriching personal interests of those closely connected to president Zuma rather than focusing on an improvement in the economy.

Gigaba has clearly tried to distance himself from notions of State Capture as far as possible, but the fact is that so long as President Zuma or someone of his own liking as successor were to remain in office, it would be difficult to see a revival in business and consumer confidence sufficient to uplift the country’s growth rate even modestly and in so doing ward off further credit ratings downgrades. So long as the Zuma faction retains the upper hand in terms of policy formulation, it is difficult to see confidence returning in the economy. The worst-case scenario of further credit ratings downgrades remains a real one. Nonetheless, one cannot find fault with the notion contained in the GIGAP of doing all to support and ensure that short-term economic outcomes in the country turn out to be slightly better than the dismal environment currently prevailing.

  • Azar Jammine is the chief economist at Econometrix. 

LIST: SA’s official 14-point plan to solve economic slump

By Fin24

Pretoria – President Jacob Zuma hosted a meeting of several ministers on June 28, where he stressed the urgency of a coordinated response, explained Finance Minister Malusi Gigaba on Thursday.

“An agreement was reached on implementation timelines for key structural reforms related to the nine-point plan,” he said.

South African President Jacob Zuma. Photographer: Waldo Swiegers/Bloomberg

The 14-point plan:

The points are listed below, with dates of the deadlines for each point.

1. Fiscal policy

  • Finalise a sustainable wage agreement: February 2018; and
  • Finalise infrastructure budget facility: October 2017.

2. Financial sector and tax policy

  • Convene financial sector summit to quantify transformation targets, including for low-income housing and transformational agriculture: December 2017;
  • Bring down banking costs by implementing Twin Peaks: February 2018;
  • Work with the Department of Trade and Industry on targeted debt relief for most vulnerable (e.g. in cases of reckless lending): February 2018; and
  • Introduce micro-insurance framework and review Cooperatives Bank framework: February 2018.

3. Leverage public procurement 

  • Implement preferential procurement regulations, which took effect on April 1 2017: July 2017;
  • Finalise Public Procurement Bill: March 2018; and
  • Finalise complementary government fund aimed at financing SMMEs in start-up phase: February 2018.

4. Recapitalisation of state-owned entities and government guarantees 

  • Continue engagements on framework for the disposal of non-core assets: March 2018;
  • Conduct detailed audit of non-strategic assets of SOEs aimed at strengthening SOE balance sheets: March 2018;
  • Finalise recapitalisation of South African Airways and South African Post Office: August 2017;
  • Reduce the issuance of government guarantees, especially for operational reasons: October 2017; and
  • Determine the consequences of SOE non-adherence to the guarantee conditions: October 2017.

5. Broader SOE reforms 

  • Implement private sector participation framework: March 2018;
  • Implement the remuneration framework: March 2018;
  • Finalise the board appointment framework: March 2018;
  • Table draft Shareholder Bill: March 2018;
  • Implement a framework for the determination and costing of developmental mandates: March 2018; and
  • Approve ToR for implementation of the Remuneration Standards oversight committee: September 2017.

6. Private sector participation (PSP) Framework 

  • Engage other departments on PSP framework: July 2017;
  • Provide broader guidance on sectors or asset classes for PSP and decide whether sector specific PSP frameworks are needed: October 2017;
  • Present potential projects for PSP to line departments, technical task team and inter-ministerial committee: November 2017
  • Approve PSP projects as outlined in the governance framework proposed in the PSP framework: March 2018; and
  • Include PSP projects in shareholder compacts and corporate plan for subsequent implantation: March 2018.

7. Costing developmental mandates 

  • Consult other SOEs on costing of developmental mandate: August 2017;
  • Implement mechanisms to effect outcomes through corporate plans (e.g. instruction notes): August 2017;
  • Roll out the template for inclusion in the 2018 corporate plans: September 2017; and
  • Monitor implementation through quarterly reports, annual reports and corporate plans: March 2018.

8. Energy

  • Approach the National Energy Regulator of South Africa regarding Eskom hardship: July 2017;
  • Develop the case for Eskom soft support until tariff adjustment in 2018 and submit to Treasury and Eskom board: July 2017;
  • Finalise lowest cost IEP and IRP, taking into account extensive comments received during public consultation: February 2018;
  • Review the pace and scale of roll-out under the circumstances of Eskom hardship and overcapacity up to 2021: August 2017; and
  • Review the level of participation by black industrialists and develop a strategy to increase it: August 2017.

9. South African Airways

  • Finalise CEO appointment: July 2017;
  • Finalise and implement five-year turnaround plan: December 2019; and
  • Negotiate with lenders to extend debt to longer-term: October 2017.

10. Telecommunications

  • Conduct high level study on WOAN spectrum needs with a view to license the remainder to the industry: August 2017;
  • Issue policy directive mandating the Independent Communications Authority of South Africa to commence the licensing process: December 2017;
  • Complete the spectrum licensing process: December 2018;
  • Direct Competition Commission to investigate the data prices: July 2017; and
  • Commence roll-out of phase 1 of SA Connect Broadband programme: August 2017.

11. Postbank licensing 

  • Amendment of the enabling legislation for licensing of Postbank: December 2017.

12. Minerals and Petroleum Resources Development Act Amendment Bill

  • Finalise MPRDA Amendment Bill in a manner that reflects the inputs of civil society, labour and industry solicited through the public consultation process: December 2017.

13. Broad-based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry 

  • Conduct further engagements with civil society, labour and industry: charter gazetted.

14. The Regulation of Land Holdings Bill

  • Table Regulation of Land Holdings Bill in Parliament (after processing by a multi-disciplinary Ministerial Think Tank, the NJSC and NEDLAC): October 2017


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