Elections seen as a vote of confidence
Trouble-free poll has encouraged reform, impressed foreign investors and may help avoid a downgrade
THE ANC’s weak performance in the recent municipal elections has the party in panic mode.
Secretary-general Gwede Mantashe told the media last weekend that it could not be business as usual and that at a national government level, the triple challenge of unemployment, poverty and inequality needed to be reprioritised in the budget.
In an effort to reverse declining support for the party, he said, the ANC intended to boost economic growth and slash growing unemployment by revitalising the National Development Plan, the government’s 20year economic plan.
Ratings agency Fitch warned that the ANC could resort to populist policies to appease dissatisfied voters. In a statement, the agency said this could include costly spending measures that could require breaching expenditure ceilings, or redistributive regulatory policies that might undermine economic growth.
However, Graham Bell, equities strategist for the Old Mutual Investors Fund at Old Mutual Investment Group, believes this is unlikely. “Given the economic policy that has been pursued since Nenegate, I think it is unlikely that there will be a swing towards populist policy. Certainly, if that was the approach a ratings downgrade would then just be a matter of time, and more often than not, ratings downgrades tend to be serial rather than one-off.”
The reality, he said, was that the budget, as announced by Finance Minister Pravin Gordhan in February, left little scope to amend economic policy to any significant degree. In order for the National Treasury to meet its fiscal objectives, it would not be able to deviate significantly from the budget.
In February Gordhan announced a number of cost-cutting initiatives and pledged to cut South Africa’s budget deficit to 2.4% of GDP within three years.
Whether Gordhan will be able to meet these targets remains to be seen. The government recently agreed to support the principle of not increasing university fees in 2017 in spite of the fact that the budget did not take cancelling fee increases into account. If implemented, the shortfall will need to come from other sources, either increased taxes or reallocated spending. Whichever option is used, it will put either consumers or the budget under even more pressure.
The Treasury will be looking to avoid increasing the budget deficit given that increased debt will pose a risk to South Africa’s investment ratings. Both Fitch and S&P Global Ratings have given South Africa a credit rating just one level above junk status. “The sovereign rating outlook for South Africa remains heavily reliant on the government’s ability to fasttrack key structural reforms to resolve South Africa’s structural growth issues,” said Momentum Investments’ Herman van Papendorp and Sanisha Packirisamy.
Bell said that with little sign of economic recovery — growth forecasts for 2016 were reduced to 0% last month by the South African Reserve Bank monetary policy committee — consumers would in all likelihood have further belt-tightening ahead. “There is a definite possibility of a VAT hike and further tax increases in 2017, which will put consumers under even more pressure.”
But on the upside, he said that there was consensus that interest rates had peaked and could even start falling in the latter half of 2017, which could see consumer spending and fixed investment picking up.
South Africa has experienced less of the headwinds facing other emerging markets, many of which are in crisis economically.
Both investors and ratings agencies have looked favourably on the fact that the local government elections were, to all intents and purposes, free and fair. “What impressed non-South African observers about these municipal elections is that they were well organised and clearly free and fair,” said McGregor.
“The behaviour of the voters reflected political maturity: there was minimal violence and some voters switched their votes to alternative parties. The whole process supported the view that South Africa is a stable democracy.”
The improvement in asset prices and the rand exchange rate since the elections, said McGregor, had little, if anything, to do with economic and political stabilisation in South Africa. “This was driven by a growing concern among investors in developed countries that interest rate normalisation will at the very least be long delayed and, as some fear, may never happen.”
South Africa, he added, had been the beneficiary of the massive shift of investment flows into emerging markets.
Bell agreed that global factors were the primary reason behind the strengthening of the rand, but said the elections were partially responsible for the improved outlook. “It’s difficult to exactly distil it down, but the rand had been strengthening even prior to the elections and this did strengthen equities that are sensitive to exchange rate fluctuations.”
He also agreed that ratings agencies would have looked positively on the recent elections.
“We showed that we can conduct an election in a fair and largely peaceful manner and that all parties accepted the outcome.”
There were three considerations that would influence the ratings agencies’ decision as to whether to further downgrade South Africa’s investment status in December, said McGregor. “First, the economy is starting to recover, which means that, in aggregate, business conditions are no longer deteriorating. Second , the Treasury is meeting the fiscal targets it set itself in the February budget, and, thirdly, so far there has been no repetition of the political disaster of last December [when Nhlanhla Nene was fired as finance minister]. The local elections were indicative of political stability.”
If these favourable trends continued, he said, South Africa was likely to avoid a downgrade.
The biggest risk, however, remained a political one. “A cabinet reshuffle aimed at removing the present leadership of the Treasury and replacing it with an appointee in whom the market has no confidence could have as dire consequences as the firing of Nene,” said McGregor.
Although there are expectations of a cabinet reshuffle in the short term, analysts and political commentators agree that President Jacob Zuma’s ability to implement ill-conceived cabinet reshuffles, particularly in the sensitive finance portfolio, have been further circumscribed as a result of the election outcomes, which saw decreased voter support for the ANC and the loss of power in key metros including Nelson Mandela Bay, Tshwane and Johannesburg. As the political process unfolds, and the shadow of Zuma lessens, this could well give hope to the next generation of ANC leaders.
“The ratings agencies will be keeping a keen eye on economic reforms and issues such as mining legislation, the implementation of a secret strike ballot, and what’s going to happen with state-owned enterprises such as SAA,” said Bell.
“Although Treasury had a clear opinion on what should happen with some state-owned entities, they have not been able to implement any of their plans.”
With little concrete evidence to date that the economy is recovering
Given the economic policy pursued since Nenegate, I think it is unlikely that there will be a swing towards populist policy The sovereign rating outlook remains heavily reliant on the government’s ability to fast-track key structural reforms
to any significant degree, Bell said the big question was whether the Treasury could deliver on its commitment to meet its fiscal targets.
These elections, he said, were a turning point given that it was the first time since 1994 that the ANC had lost ground to a credible opposition. “For the first time the DA offered a credible alternative to some black voters while the EFF has overcome the curse of COPE and proved its staying power,” Bell said.
“However, it’s going to be extremely difficult for local coalition governments to work together and deliver at a local government level in spite of a genuine desire to respond to voter dissent, particularly in areas such as Gauteng.”
In the long term, he said, the succession battle in the ANC would be interesting to watch. “My bet is still with Cyril Ramaphosa, given that in South Africa the deputy president traditionally succeeds to president and that he is a consummate operator in a party which dislikes its dirty laundry being made public.”