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Fitch warns on SA economic growth restraints

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Ratings agency Fitch has warned that South Africa needs to ramp up its structural reforms to address weak economic growth outlook in the medium-term.

The ratings agency said the economy remained severely troubled by the impact of electricity capacity constraints, a struggling logistics sector and a high level of inequality. Picture: Reuters

RATINGS agency Fitch has warned that South Africa needs to ramp up its structural reforms to address weak economic growth outlook in the medium-term.

The agency said that the country’s gross domestic product (GDP) would remain below 1% again this year as a result of the ongoing energy crisis, logistical constraints and high levels of income inequality.

Fitch’s primary ratings analyst, Thomas Garreau, said they were forecasting that real GDP growth would accelerate to 0.9% in 2024, and 1.3% in 2025, from an estimated 0.5% in 2023.

If the economy grows by 0.5% in 2023, as forecast by Fitch, it would be below all other estimates as the SA Reserve Bank and the National Treasury both forecast 0.8% growth.

Garreau said the economy remained severely troubled by the impact of electricity capacity constraints, a struggling logistics sector and a high level of inequality.

However, he said the opening of Transnet’s infrastructure to third-party freight operators last year would help improve the performance of the logistics sector.

“Further incremental progress on the 35 priority reforms identified by the government under Operation Vulindlela, launched in 2020, was recorded in the second half of 2023, mainly in the energy and logistics sectors,” Garreau said.

“Although the reforms will contribute to a modest increase in real GDP growth in the near to medium term, they are limited in ambition and we do not think they will significantly enhance South Africa’s low growth potential, which we estimate at 1.2%.”

Operation Vulindlela is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery.

It aims to modernise and transform network industries such as electricity, water, transport and digital communications, including prioritising reforms to the visa regime in a bid to attract skills and promote growth in tourism.

However, Fitch noted the slow improvements with power generation capacity, saying load shedding would reduce in intensity in 2024 and 2025, compared with 2023, but would not disappear.

Garreau said the return to the grid of three units at Kusile power station, and the synchronisation of unit 5 late last year added a total 3,200MW to generation capacity.

“Further capacity is expected to come from private-sector investments, with a pipeline of confirmed projects representing 12GW of new capacity,” he said.

“The legal separation of Eskom into three divisions, intended to further catalyse investment in generation and transmission, is moving slowly, and we do not expect full separation before 2025.”

The unbundling of Eskom into three units – generation, transmission and distribution – is aimed at creating a competitive and open electricity market.

The ratings agency left South Africa’s credit rating unchanged at “BB-” with a stable outlook.

This means South Africa’s sovereign bonds still remain below investment level by all three major ratings agencies: Fitch, S&P Global and Moody’s.

Fitch forecast a widening of the consolidated fiscal deficit to 4.7% of GDP in the 2023 financial year, up from 3.7% in the 2022 financial year.

It said this would be driven by an erosion of revenue collection hampered by low real GDP growth; low corporate profitability; upward expenditure pressure, stemming from the public-service agreement that was signed after the budget was released; and, interest payments.

The general government debt, according to Fitch, will reach 83.2% of GDP in the 2025 financial year, from an estimated 76% in the 2023 financial year, due to a primary surplus below its debt-stabilising level, weak growth and large stock-flow adjustments.

In response to Fitch, the National Treasury said the government would focus on raising GDP growth by improving the provision of electricity, logistics and enhancing the delivery of infrastructure over the medium term.

“Fiscal policy continues to support this approach by stabilising debt and debt-service costs,” Treasury said.

“Government reiterates that fiscal consolidation will be implemented through spending reductions, efficiency measures across government and moderate tax revenue measures.”

– BUSINESS REPORT

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