ECOWATCH

Financial Mail - Investors Monthly - - Contents -

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.