Addressing SA’s Ailing Economy: World Bank Warns SA To Stop Excess State Spending


The state of the nation’s economy has forced every South African to fear and possibly hate the ratings agencies, but World Bank says SA needs to focus on government’s spending instead of downgrades by the big three rating agencies

The ratings of the nation by the big three credit rating agencies including Standard & Poor’s (S&P), Moody’s, and Fitch Group seems to be one major topic that puts fear in South Africans and the government on its toe. Simply put, the fear of rating agencies in SA is the beginning of economic turn around for all.

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But, Sébastien Dessus, the World Bank’s programme leader for Africa said while presenting an economic update for South Africa to Parliament’s standing committee on appropriations on Wednesday morning, that though the rating agencies have a role to play in the nation’s economy its effect should not be placed above other important issues like government’s excessive spending.

“A downgrading would be a negative outcome for South Africa. It is not the end of the world, too,” he said not only to South Africans but to all African countries.

He said the focus should not be on avoiding a downgrade, but on the quality of state spending and on the management of the economy.

He also said if the ratings agencies downgraded South Africa’s status to junk, 1% would have been shaved off the GDP, dumping 160 000 people in poverty.

The SA economy has been under severe pain following a rising crisis in the nation’s political and social stand, coupled by an increased government frivolous spending.

Moody’s on Wednesday (1 February) joined other global ratings firm S&P Global in warning South Africa about its political climate, which is hampering the country’s ability to make the necessary policy changes to spur growth.

The group said political tensions impeded key structural reforms such as comprehensive reforms of state-owned enterprises which are yet to take place and hampered growth, another key credit challenge.

Despite SA resilience to this downward trend, it is on the edge, with S&P holding the country at a BBB- rating (one notch above junk) with a negative outlook, Moody’s has the country at BBB (two notches above junk), while the other major ratings firm, Fitch, is at the same level as S&P.

Finance Minister, Pravin Gordhan last year, proposed a cut in social spending as one way government could cut costs amid an increase in economic difficulties.

Social spending being referred to here includes money spent on basic education, health, post-school education and training, local development and social infrastructure and social protection, namely grants.

The total social spend has risen from around R956-billion in the 2012/2013 financial year to over R1,1-trillion in 2014/2015, and represents some 63% of total budget expenditure.

Meanwhile, the World Bank foresee a modest and fragile economic recovery in South Africa over the next year except if private investment accelerates.

The world bank urged South Africa to re-orientate its investment tax incentives to include agriculture, manufacturing, construction, and trade. This would encourage investments and job creation and would  help invigorate the country’s economy.

“There is a lot of potential to attract investors if conditions are better for investors in South Africa,” Dessus said, pointing out that SA’s economic growth wasn’t sufficient enough to lift people out of poverty.

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The World Bank has forecast that 2016 will be the third year running that South Africa experiences negative GDP per capita growth. This happens because the population grows faster than the economy.

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