The main economic events in August are a potential update from Moody’s on SA’s sovereign credit ratings, and in the US the annual Jackson Hole economic conference may provide greater clarity on the unwinding of monetary policy.
The probability of another ratings downgrade for SA is high given the collapse in business confidence and the economy’s slide into a recession. This, coupled with the drift towards more populist policy choices, the failure to clean out the state-owned enterprise (SOE) stable or introduce any material pro-growth reforms are all weighing on SA’s ratings.
But even though the economic and political climate continues to sour, it would be surprising if Moody’s moved again so soon, having downgraded SA’s local and foreign ratings to the cusp of junk in June. Moody’s is scheduled to make a potential announcement on August 11.
BNP Paribas SA economist Jeff Schultz expects Moody’s to issue a statement affirming its negative outlook and registering its concern over policy and leadership battles in the economy, the growing contingentliability risk emanating from SOEs, as well as recent “attacks” on the Reserve Bank.
In June, Moody’s expressed scepticism over whether SA would achieve a political consensus that would support investment and reinvigorate reform. It warned “heightened political dysfunctionality, continued gradual institutional
The first concern is that policy and leadership battles continue to detract from the implementation of the reforms needed to get growth going
weakening and diminished clarity over policy objectives” were more likely.
The trajectory of SA’s rating comes down to government’s ability to safeguard the country’s institutional, economic and fiscal strength.
“Indications that the strength and independence of the country’s institutions have diminished … or that the emerging policy framework has become even less predictable or has shifted in a way likely to undermine economic or fiscal strength, could lead to a further downgrade,” Moody’s warned.
Schultz doesn’t think the situation has deteriorated so much that SA’s ratings with Moody’s will be cut to junk, but he fears the “noise levels” are such that Moody’s is likely to “sit up and take notice”.
The first concern is that policy and leadership battles continue to detract from the implementation of the reforms needed to get growth going.
Treasury’s recent decision to give SA Airways another bail-out will not have gone unnoticed, says Schultz. “Further warnings related to SA’s growing contingent liability risk (through bloated government guarantees and consistently poor governance at SOEs) will also form part of [Moody’s] affirmed review and maintenance of a negative outlook.”
He also expects Moody’s to express its discomfort at growing attacks on institutions — the Reserve Bank in particular.
Rand Merchant Bank (RMB) economist Ilke van Zyl expects Moody’s to wait until after finance minister Malusi Gigaba’s tabling of the mediumterm budget policy statement (MTBPS) on October 25 before fine-tuning SA’s ratings.
The continued deterioration in SA’s fiscal position was a key motivation behind the June downgrade, she notes. “Significant fiscal slippage will not go down well with Moody’s.”
The MTBPS will reveal how Gigaba plans to manage the build-up of fiscal pressure. With economic growth shrink-
ing rapidly below treasury’s growth forecasts of 1.3% for 2017 and 2% for 2018, the country is headed for another huge revenue shortfall.
Just to stick to the existing fiscal consolidation path was going to require an additional R43bn in revenue and a R52bn cut to the spending ceiling over the next two fiscal years.
If growth is half of treasury’s estimates, but tax buoyancy recovers to above one and inflation averages 6%, an extra R40bn will be needed over that period, estimates RMB.
A one percentage point hike in Vat would generate about R20bn in extra revenue. It would be the least economically damaging means of raising revenue but, because of the impact on the poor, would be political suicide for the ANC in the run-up to the 2019 election.
Taxing the rich more seems inevitable but is unlikely to yield much given how few people are in the highest tax brackets. The latest GDP data shows there will be a large negative impact on growth if taxes are raised further.
Cutting public expenditure ruthlessly could also be selfdefeating. This means that to prevent a blow-out in public finances, Gigaba has little option but to restore business confidence. And yet this would require leadership that understands SA is in danger of losing its grip on fiscal sustainability.
There was no sign of this at the ANC’s June policy conference. On the contrary, the faction allied to President Jacob Zuma pushed for policies that would weaken confidence and growth — if not destroy it.
They included demands for the nationalisation of the Reserve Bank, the endorsement of the mining charter, land expropriation without compensation, and a big push against “white monopoly capital”. Of these, only the first was adopted by the conference.
Though nationalising the Bank would have no bearing on its independence or behaviour, the spectre of interference at the Bank has spooked the markets. The fear is not about short-term impact but about the populist direction in which SA is heading.
There’s no doubt that by adopting specious, knee-jerk solutions when cool heads and pragmatic policy is desperately required to restore confidence and growth, SA is accelerating its downward slide.
Further delays in the enactment of growth-enhancing reforms will be another red flag to rating agencies, warns Van Zyl, as will be any more delays in reforming SOEs.
There is no escaping the conclusion that government has to change tack decisively in the way it is running the country. If it is incapable of doing what is necessary to win back business confidence it runs the risk of dooming the economy to further credit rating downgrades and growth disappointments in a downward spiral.
From August 24 to 26, central bankers, finance ministers, academics, and financial market participants from around the world will gather at Jackson Hole in the US to discuss this year’s theme, “Fostering a Dynamic Global Economy”.
The conference usually presages any changes to the US Fed’s monetary policy conduct and its balance sheet roll-back plans are bound to be discussed, according to Van Zyl. At the time of writing the market was expecting the Fed’s unwind to begin in September and the odds of a December rate hike were below 50%.
Over the past year, the global environment has supported the SA economy through firmer commodity prices, while the global search for yield has resulted in fairly strong inflows into the local bond market. This explains rand firmness over the first half of the year.
A one percentage point hike in Vat would generate about R20bn in extra revenue
However, the intention by a number of central banks, including the Fed, to reduce global liquidity could reduce flows to emerging markets and create more challenging conditions, warns Old Mutual Investment chief economist Rian le Roux. Renewed commodity price weakness would compound this.
“The global economy is on a solid footing for now,” he says, “but the risks associated with the coming stimulus roll-back remain considerable.”
With global support likely to fade, the urgency to rebuild confidence in the SA economy to foster faster economic growth, investment and job creation has become urgent.