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South Africa’s economy in danger of sovereign downgrade

S. Africa's economy faces challenge of sovereign downgrade - minister

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South Africa

One of the more critical challenges facing the South African economy is the prevention of a sovereign rating downgrade to sub-investment grade, Minister in the Presidency Jeff Radebe said on Wednesday.

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South Africa
“We know that a sovereign downgrade would have ripple effects that will reverberate throughout the economy and will be felt by businesses and households alike,” the minister told the Bloomberg Africa Business and Economic Summit, taking place in Cape Town.

The summit brought together leaders in business, government, non-profits and education from around the world, with the aim to foster discussions on the opportunity to invest and do business in Africa, as well as African business’ efforts to globalise.

The meeting took place as South Africa was facing the possibility of being further downgraded by international rating agencies.

After downgrading by Fitch, Standard & Poor’s and Moody’s late last year, South Africa’s credit rating stands at BBB- and Baa3 (a rating equivalent), respectively. That means the country is at very real risk of becoming a junk country, which has substantial implications for investment.

Standard & Poor’s has warned that any deviation from the South African fiscal policy could lead to a credit downgrade.

Radebe said his government is taking steps to address concerns raised by the rating agencies.

The ratings agencies have cited factors such as the shortage of electricity which is constraining growth, rising government debt, weak business confidence, the challenging environment for doing business, and uncertainty caused by proposed policies not conducive to growth.

The policies cited include the new visa regulations, “delays to the mineral resource law and prospective plans for land reform and a national minimum wage”.

In addition to the matters raised by ratings agencies, the South African economy is challenged by acrimonious labour relations, low consumer confidence, severe drought, and weak export performance, among others, Radebe said.

“As many of these factors are domestic and therefore within our control, I want to assure you that each of them is receiving the full attention of the South African government,” he said.

One of the actions the SA government is taking is to stabilise government debt, said Radebe.

The government will not increase its borrowing limit and will have to make do with the available resources, calling on all of South Africans to be more efficient with the use of public resources and strive to get optimal value for every rand spent, he said.

“Amongst short-term measures we have agreed to take are the elimination of wastage and the eradication of non-essential spending to ensure that we do not breach our agreed fiscal ceiling,” Radebe said.

Addressing the energy challenge remains a top priority, he said.

South Africa, he said, has a large and internationally recognised Renewable Independent Power Producer Programme (REIPP) which will soon launch its fifth bidding window and has unlocked in excess of 190 billion rand (about 12.3 billion U.S. dollars) in private investments in energy.

As part of the renewal energy programme, 92 projects have been awarded thus far and will generate a total of 6,327 MW. Of these projects 37 are already operational and are delivering 1,827 MW to the grid, according to Radebe.

Attracting sufficient foreign investment remains a challenge, he said.

To meet this challenge, the government is establishing a One Stop Shop to serve as a clearing house for all investment to help deal with the challenge facing many investors who have to deal with numerous departments and comply with multiple regulations which can be very confusing and time-consuming, according to Radebe.

“This initiative is intended to signal that South Africa is truly open for business,” he said.

Source: Xinhua

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