Hold on to your hat
Local and foreign investors will be watching closely as President Zuma delivers his state of the nation address and Minister Gordhan presents his budget
Ordinary South Africans, local businesses, foreign investors and ratings agencies are going to be scrutinising two major events this month for how the government plans to restore growth and avoid a devastating credit downgrade. The first key event on the calendar will be President Jacob Zuma’s state of the nation address (Sona) on Thursday evening, and the second will be Finance Minister Pravin Gordhan’s budget speech on February 24.
Ahead of Sona, Zuma will meet with the chief executives of top companies on Tuesday in Cape Town “to reflect on ... lessons learnt for the South African economy during the current negative economic climate and slow growth”.
Peter Attard Montalto, a London-based economist with Japanese investment bank Nomura, said in a note: “The Sona by President Zuma on February 11 is actually more important in our view than the budget on February 24.
“We expect no major surprise policies or any major growthboosting policies to reassure ratings agencies – despite rhetoric about doing everything to secure the rating,” said Montalto.
Government faces a big task to ensure it shores up confidence, as there were more signs this week that the South African economy has hit an iceberg and is steadily sinking.
This week, the World Bank slashed its forecast for local growth this year to 0.8%, joining the International Monetary Fund and the SA Reserve Bank, which cut their growth forecasts to 0.7% and 0.9%, respectively.
The lowest forecast among local economists is for growth this year of just 0.2%.
This week, two purchasing managers’ indexes, which showed the manufacturing sector in contraction, a report of a further drop in monthly car sales and a new policy uncertainty index pointed to the bleak state of the economy.
At a Gordon Institute of Business Science economic outlook conference held in Johannesburg this week, RMB chief economist Ettienne le Roux said that about 40% of the components of local gross domestic product were already in recession.
“South Africa is in a borderline-recession situation. Another shock could push the economy over the edge,” said Le Roux.
He said government’s budget deficit needed to come down drastically, and the tax burden was going to increase. The impending tax hikes came amid an environment in which consumers were already cutting spending and becoming more conservative, he said.
“It is going to be tricky for the economy to grow,” added Le Roux.
Arthur Kamp, a Sanlam investment management economist, said the budget speech needed to present credible growth forecasts and display lower expenditure growth.
Investors would also be looking for what government planned to do to boost growth.
At an event at the end of last month, Gordhan met with a number of local industry bosses, especially the banks, to hear concerns about the economy, particularly the possible downgrade of the country’s rating to junk status.
Such a downgrade would hike the local cost of debt, could result in foreign money invested in state and corporate bonds exiting the country and push the rand to a historic low.
The meeting with Gordhan was organised by businessman Jabu Mabuza.
A key imperative was to create a “positive narrative” and rebuild confidence in the short term, said Mabuza.
A second key issue was to get domestic investment flowing, Mabuza told City Press this week.
“The main thrust was to recognise that we are in a crisis,” he said.
If the state’s credit ratings are downgraded, the banks would inevitably be downgraded too, as would major corporations that raise debt through bonds.
Cas Coovadia, the managing director of the Banking Association of SA, said the association and its members were “going to work hard to avoid a downgrade”.
“This is a crucial couple of weeks for the country, with the Sona and then the budget speech. We have to send a clear message that we will have fiscal discipline and a good investment,” said Coovadia.
“It is critical to control the fiscal deficit and broaden the tax base. There has to be a clear message on state-owned enterprises.”
South African banks and other corporations were dependent on bond financing due to the “mismatch between deposits and loans” in the local financial system, he said. “If these costs go up, credit gets more expensive.” Gordhan appears acutely aware of the task he faces and told the Financial Times in an interview this week that he would defend the country’s credit ratings.
“We are very committed to restoring credibility in our fiscal path,” he said.
Gordhan, who was the country’s finance minister from 2009 to 2014, was reappointed to the job in December after Zuma fired his successor, Nhlanhla Nene, and replaced him with little-known ANC MP David van Rooyen – for only four days, before changing his mind.
This upheaval in the department has investors worried about political interference in economic policy.
Montalto said South Africa would probably be downgraded because of its lack of growth prospects and investmentfriendly environment.
Amid the junk status hysteria, Investec Asset Management strategist Nazmeera Moola pointed out that the credit rating in question that could be downgraded to “junk” was only the foreign currency one.
However, the sentiment that came with a downgrade would nevertheless be very damaging, said Moola.
Only about 10% of South Africa’s government debt is in foreign “hard” currencies, which would limit the effect of the expected downgrade.
ALL EYES Finance Minister Pravin Gordhan and President Jacob Zuma are both under pressure to deliver this month as SA faces further downgrades from ratings agencies