Fitch: Zuma resignation reduces S Africa policy paralysis risk

The resignation of Jacob Zuma as president of South Africa reduces the risk of policy paralysis, Fitch Ratings says. Zuma’s successor, Cyril Ramaphosa, will bring a greater focus to improving governance and strengthening economic and fiscal policy, which is likely to contribute to a recovery in business confidence and growth. Whether this will be sufficient to lead to a significant improvement in the government debt trajectory and trend growth is uncertain.

Zuma’s resignation has reduced the risk of policy paralysis that could have been caused by a dual power structure if he had served out his presidential term until elections in 2019 following Ramaphosa’s election as head of the governing ANC in December.

Ramaphosa’s early succession suggests that support among senior ANC members is coalescing around him. But divisions within the party remain, and preparations for next year’s parliamentary elections could also affect policy-making through 2018.

Ramaphosa appears committed to addressing shortcomings in governance at state-owned enterprises (SOEs). Contingent liabilities from SOEs (18% of GDP) are a significant risk to public finances. Ramaphosa drove the installation of a new board of Eskom in January and recent high-profile police raids suggest investigations into corruption at SOEs have been stepped up.

As long as growth is too weak to significantly improve living conditions for the majority of the population, political pressure could lead to populist policies that harm growth or public finances. The ANC’s adoption late last year of a resolution in favour of land expropriation without compensation points to such pressure, although Ramaphosa in his State of the Nation Address pledged to implement the policy in a way that minimises negative economic effects.

The budget speech due on 21 February will be an indicator of the direction of fiscal policy under Ramaphosa and how the authorities aim to deliver planned fiscal tightening. The new president has spoken in favour of fiscal discipline, but the main guidelines for the budget and much of the detailed work will likely have been prepared under Zuma. We also expect that pressure to address inequality will continue to grow, complicating the new administration’s efforts to arrest the rise in government debt. One challenge will be financing new policies, including free tertiary education for a large share of the population to be introduced this year and, in the medium-term, the planned National Health Insurance.

The market reaction to Ramaphosa’s appointment suggests investors and businesses view his commitment to tackle corruption and revive the economy favourably. The political backdrop has depressed confidence and growth in recent years, and the advent of a new president may support the current cyclical recovery. We forecast real GDP growth to rise to 1.6% this year and 2.0% in 2019, but this would still be lower than the ‘BB’ rating category median. (We affirmed South Africa’s ‘BB+’ rating with a Stable Outlook in November 2017.)

Ramaphosa has promised a number of initiatives to increase employment and strengthen growth, including a resolution of the stand-off between the government and the mining companies over a new mining charter, which could help rekindle investment in the sector. However, the impact of the measures on overall growth is likely to be relatively modest and passing more substantial reforms could remain challenging. For example, major labour market reform is likely to be opposed by the powerful unions. It remains uncertain whether an improvement in general policy-making and a sustained improvement in confidence would be sufficient to raise trend growth substantially.