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

CityPress - - Business - JUSTIN BROWN and DE­WALD VAN RENS­BURG busi­ness@city­press.co.za

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.

PHOTO: HER­MAN VER­WEY

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

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