Fitch Solutions’ Sub-Saharan Africa reform tracker shows Southern Africa continues to underperform when it comes to implementing reforms compared with the rest of the continent but the latest results show progress in some areas.
In its latest August report, the US-based agency revised SA’s score to 5.5 out of 10 in the third quarter — from five previously — to reflect progress in the government’s privatisation efforts.
Fitch, through its BMI Market Research agency — a research firm that provides macroeconomic, industry and financial market analysis covering 29 industries and 200 global markets — cited the government issuing the National Transmission Company of SA (NTC) with a licence to operate a transmission system as positive.
The agency said the separation of the NTC from Eskom’s large debt burden will make it more attractive to private investors.
“This is the first Eskom unit to be unbundled following President Cyril Ramaphosa’s announcement in 2019 that Eskom would be separated into three wholly owned entities (transmission, generation and distribution),” Fitch said.
“The privatisation of Eskom is essential in creating a competitive electricity market in SA as this would increase grid capacity and reduce the frequency of blackouts, which pose obstacles to business activity,” Fitch said.
Another positive reform that improved SA’s reform tracker score is Transnet’s July announcement that the Port of Durban — the largest port in Africa — will be partly owned by the Philippines’ International Container Terminal Services.
“This partial privatisation will encourage greater investment, with Transnet also announcing that the port of Ngqura is next in line,” Fitch said.
A negative on the SA score is the recent tightening of labour market conditions. Fitch said this prevents a greater upward revision to the score. Fitch said the government’s decision to sign into law the Employment Equity Act, which will come into effect on September 1, will increase the complexity and rigidity of the labour market.
“The act requires any business owner with over 50 employees to adhere to racial and gender quotas set by the government, as opposed to previous legislation that allowed employers to set their own diversity targets,” Fitch said.
The agency said the quotas, which vary by sector and geography, could weigh on the country’s labour market attractiveness for some investors.
Angola had its score revised from 4.5 in the second quarter to five out of 10 in the third. Fitch said the slight upward revision follows Angolan authorities’ decision to gradually start phasing out fuel subsidies in June to improve the country’s fiscal metrics.
“In line with the IMF, we estimate that fuel subsidies accounted for 2.7% of GDP in 2022, weakening the government’s ability to invest in healthcare, education and local businesses,” Fitch said.
“We believe that lower global oil prices in the second half of this year compared to the same period last year will mean that the government will implement more subsidy cuts in the months ahead.”
Fitch warned that progress on Angola’s privatisation programme remains sluggish. It said the Angolan government has fallen behind schedule, having extended the programme’s timeline to 2026 from the original end-2022.
“So far, 96 out of 178 planned state-owned enterprises (SOEs) have been privatised, leaving 82 assets to be sold. Major SOEs like Sonangol and Endiama will be sold in 2027, after the privatisation programme deadline,” Fitch said.
Given Angola’s projected recession — it forecast real GDP contracting by 0.7% in 2023 — and global economic weakness, Fitch does not expect big gains in Angola’s privatisation programme over the coming months.
Nigeria was named best performer in terms of reform momentum, scoring 6.5 out of 10 in the third quarter compared with three out of 10 previously.
Fitch said this is because Nigeria’s new president, Bola Tinubu, has embarked on a rapid reform agenda since his inauguration in May, cancelling Nigeria’s long-standing fuel subsidy, which had become a significant drag on public finances.
“We estimate the federal government forwent 4.6-trillion naira, or 82% of federally retained revenues, in 2022 to fund the subsidy, severely limiting its ability to provide public services and spend on growth-generating investment projects.”
It said: “From a fiscal perspective, the removal of the fuel subsidy will improve the ability of the Nigerian National Petroleum Corporation to remit more funds to federal accounts.”
The central bank’s removal of Nigeria’s multiple exchange rate windows, which had worsened dollar shortages and weakened foreign investment, also increased the score.
The sharp devaluation of the exchange rate will push up revenues in local currency terms from the vital oil and gas sector. Fitch forecast that the fiscal deficit will shrink from 4% of GDP in 2022, to 3.6% in 2023 and 2.9% in 2024.
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