Fitch warns Ramaphosa scandal will increase political instability

All eye’s are on how and whether South Africa can survive yet another scandal involving a sitting president.

International sovereign ratings agency, Fitch, is among the many spectators who’ve weighed in on the Phala Phala farm saga that is derailing President Cyril Ramphosa’s political career and the consequences for the country if he has to leave office.

“The findings against South Africa’s president, Cyril Ramaphosa, by a panel established by parliament have raised questions over his future, and could influence policy and the political prospects of the governing African National Congress (ANC) ahead of elections in 2024,” said Fitch Ratings.

“Nonetheless, we still see broad policy continuity as the most likely scenario.”

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Political barriers to impeachment are high

While the Section 89 Panel investigating the handling of the theft of foreign exchange from Ramaphosa’s game farm in 2020 concluded that the president may have committed several violations, the possibility of a successful impeachment process is low.

Reaching the necessary two-thirds majority would require significant numbers of ANC legislators to vote against the president.

The ANC currently holds 58% of seats in parliament. The opposition also has the option to push for a vote of no confidence in the government, which requires a simple majority.

Fitch noted that the Phala Phala scandal may have negatively affected support for Ramaphosa ahead of the governing party’s five-yearly conference scheduled for later this month.

“Even if the president were to resign, we believe that it is more likely that a potential successor would emerge from the president’s moderate wing of the ANC rather than the Jacob Zuma-linked Radical Economic Transformation faction, which advocates more populist approaches,” said Fitch.

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SA’s economic policies are unlikely to change

“When we affirmed South Africa’s rating at ‘BB-’, with a Stable Outlook, in November 2022, we stated that the party could lose its majority in 2024, but that we did not expect this to lead to immediate changes in economic policy, as the ANC would most likely remain in government in alliance with smaller parties.”

Fitch reiterated the importance for government to maintain it’s current outlook for public finances, and for its debt trajectory which remains an important rating sensitivity for South Africa.

“Socioeconomic pressures, against a backdrop of high unemployment and extreme income inequality, are already a constraint on the pace of fiscal consolidation,” Fitch warned.

It warned that should government respond to the scandal by raising public spending beyond expectations, it would result in a sustained widening of the fiscal deficit that points to a sharper rise in the government debt/GDP trajectory.

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“This could lead to re-emergence of downward pressure on the rating. However, the authorities have been relatively consistent in pursuing their debt stabilisation strategy in 2022.”

But historically, ANC governments did not have a record of substantially loosening policy ahead of elections to boost their electoral prospects – though in the past their support was firmer.

“Our baseline assumption remains that the consolidated fiscal deficit will stand at 5.1% of GDP in the fiscal year ending March 2023 (FY22/23) and stay close to that level in the following two years.”

Fitch warned that political instability and increased uncertainty about the policy outlook could further weigh on near-term investment prospects if they weaken business sentiment.

It also cited South Africa’s deteriorating power and transport infrastructure as a major constraint on the economic growth outlook.

“The country’s low growth potential, which we estimate at 1.2%, remains a key credit weakness,” Fitch concluded.

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