Welcome 2017 – Why we will be poorer this year

South Africa faces the prospect of an increased battle for resources, as well as greater and more explosive social unrest, as its citizens are set to become poorer for the third consecutive year.

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JOHANNESBURG, South Africa – (City Press) News24 — This week, the International Monetary Fund (IMF) forecast that, on a real GDP per capita basis, the average South African would suffer in 2017 as local population growth exceeded economic growth.

This after declines in economic growth in 2015 and 2016.

The IMF went on to predict that South Africans, on average, would be 2.4% poorer in 2017 than they had been in 2014.

It also cited perceptions of weakening governance and rising uncertainty regarding policy direction as being likely to weigh on the country’s economic growth next year.

Challenge to the big three

Brics ratings agency a pipe dream

Plans by the five-nation group of developing countries – namely Brazil, Russia, India, China and South Africa (Brics) – to form their own credit ratings agency, aimed at challenging dominant Western agencies Fitch, Moody’s and S&P Global, would be a ”waste of time”, said Treasury’s director-general, Lungisa Fuzile.

He added that these plans, announced by Brics members in October, were mooted for political reasons as they had expressed the belief that Western agencies favoured developed economies.

Sibongiseni Mbatha, head of the Association of Black Securities and Investment Professionals, said Brics would challenge the existing rating system by having prospective investors pay for the rating of an issue of a debt instrument.

“In preparation for the Brics agency, Exim Bank [an Indian bank] has prepared a proposal and ratings agency Crisil has conducted a study for India,” he said.

This view was backed up by Lungisa Fuzile, the Treasury’s director-general.

At an event hosted by the Association of Black Securities and Investment Professionals this week, he echoed the IMF’s sentiments, saying GDP per capita was set to fall “for quite a while” and South Africans, on average, were going to become poorer.

Isaac Matshego, a Nedbank economist, said the decline in per capita income would put greater weight on available resources and increase the chances of social instability, fuelling movements such as #FeesMustFall.
“Vulnerable people are going to feel it the most. This is why it is so important to increase growth and boost job prospects,” Matshego said.

The declining income comes amid levels of inequality – among the highest in the world – that characterise South Africa.

This is made worse by the country’s unemployment rate, which currently stands at 27%.

Nic Borain, a political and investment analyst at BNP Paribas Securities SA, said falling average income, together with inequality and high unemployment, could lead to political unrest, a loss of faith in the democratic process and the formation of a radical political party or groups.

“We do not face a revolution, but the present situation is not good for social cohesion,” he said.

“The economy is hardly growing. We need growth,” Fuzile said, adding that the local economy was the central target for government to strengthen its fiscal position.

He said government would be forced to adopt “stopgap measures” because of the lack of growth.

These included finding ways to cut expenses and increase taxes.

“The benefits of growth should be shared more equitably. It is hard to distribute wealth amid shrinking opportunities,” he added.

To grow the economy South Africa needed to “fix its politics”, he said.

Extension of contract

Eskom assured of access to funding

Treasury was looking to extend the R350 billion Guarantee Framework Agreement (GFA), which expires in March, because the completion of Eskom’s major projects – such as the Kusile and Medupi power stations – had taken longer than expected, Fuzile said.

“The programme is going to take longer, so it is now necessary to extend [the guarantees],” he added.

“All the debt raised via the guarantees will remain guaranteed for the full term.

“We may ask Eskom a few questions, but they would never be of a nature that the guarantees won’t be extended.

“[The length of the extension] is going to depend on many things, including how long the build programme is going to take.”

Earlier this month, ratings agency Fitch downgraded Eskom’s credit rating, stating:

“If the GFA is not granted, this would introduce uncertainty to the borrowing plan and Eskom could face a funding crisis, considering its capital expenditure plans.”

It is well known that Finance Minister Pravin Gordhan and President Jacob Zuma and his proxies have been at war since Gordhan was appointed to the post last December.

This while the ANC elective conference looms in 2017 and candidates and their supporters are jockeying for positions.

Fuzile said two of the three major ratings agencies made mention of “political infighting” in their recent reviews.

“The world is seeing what is happening,” he said.

Sibongiseni Mbatha, president of the black securities association, said the major political risk facing the country was that “a huge proportion of poor people in our population coexist with massive disparities in wealth”.

“There is a close link between political and economic growth. When there is political stability and well developed infrastructure, there will be an inflow of foreign investments.”