SOUTH AFRICA: Election upset good for reforms, pressure on spending

Moody’s Investors Service said in its initial response to the results that “while the emerging pluralistic party competition has the potential to generate reform momentum over the medium term, near-term risks of policy distraction and spending pressures are also rising.”

Urbanisation, growth of the black middle class, and generational change among voters, which underpin the deepening of the pluralistic party competition, are likely to accelerate over the medium term and drive structural reforms and credit quality improvements, the rating agency said. However these reforms will take time to give pay-offs and positively influence key credit metrics. Moreover, the increased political competition also has the potential to distract efficient policy implementation in the run up to 2019 national elections.

“South Africa’s (Baa2, negative) changing political landscape will likely result in accelerated pro-growth reforms and improved service delivery over the medium term. These developments could drive improvements in key credit metrics, but will take time to materialise. Meanwhile, near-term spending pressures are likely to rise,” said Zuzana Brixiova, a VP-Senior Analyst at Moody’s.

The election results reflect the rising influence of opposition on the policy agenda. This is underpinned by the ongoing societal trends and change among voters where the larger segments are from the black middle class, born-free, and urban, demanding faster socio-economic changes. These long-term trends create opportunity for reviving the ‘Africa rising’ narrative and could help South Africa escape the low growth trap of past several years.

The change in the political power balance infers a shift from redistributive policies towards more growth-oriented economic management and business-friendly reforms that will expand job opportunities, especially for the country’s youth, while improving service delivery.

Moody’s notes South Africa’s high youth unemployment and weak economic growth. South Africa’s growth remains anaemic, with the South African Reserve Bank (SARB) having reduced its growth forecast for 2016 to 0% and just above 1% for 2017.

At this rate, growth will not generate enough jobs for South Africa’s already highly unemployed population. Nationwide unemployment stood at 26.6% of the total labour force and youth unemployment (that is unemployment rate for people aged 15-34 years) at 37.5% in the second quarter of 2016.

Source: Financial Mirror.