Political noise may spur downgrades

CITI EXPECTS A R33-BILLION SHORTFALL FOR THE BUDGET Increased political manoeuvring could herald more credit ratings downgrades by year’s end after the latest reshuffle.

President Jacob Zuma on Tuesday announced six changes to his Cabinet, including in the higher education and training, energy and home affairs departments. The surprise reshuffle has again raised concerns over political and policy certainty.

March’s Cabinet reshuffle, which saw Pravin Gordhan fired as finance minister, triggered sovereign ratings downgrades to sub-investment grade by S&P and Fitch. Moody’s cut its rating to one notch above junk with a negative outlook.

The ratings agencies have since warned “political noise” could detract from the implementation of growth-enhancing reforms.

According to Citi economist Gina Schoeman, the baseline scenario is for S&P to downgrade in June but it may do so earlier if pushed. She said the ratings agency wasn’t in a rush to make a decision, especially as its negative outlook on the sovereign only expires in April.

“They still have to make the correct decision and that means they want as much information as possible … I believe they want to see the outcome for December and how this impacts the February budget,” she said referring to the ANC’s December conference.

She added that February’s budget would be the most important indication regarding the trajectory of fiscal policy and that it would likely be influenced by the outcome of the ANC’s elective conference.

“The October [medium-term budget speech] is just an update and the finance ministry will only present what it is comfortable with, particularly given the political situation.”

By Citi’s estimates– which consider revenue collection from March to July 2017 – a R40 billion shortfall in main budget revenue for the 2017-2018 financial year is expected. However, strong seasonal revenue collection in the second half is to reduce this to a R33 billion shortfall, which would equate to a 4.3% budget deficit, provided expenditure remains the same. Should expenditure, currently R22 billion below target year-to-date, be cut by R25 billion, the budget deficit would be 3.7%.

“The finance ministry looks at all these scenarios and I don’t think that they are happy to print a main budget deficit ratio this year with a four in front of it … So certainly, they are going to have to do something.” This could be less realistic macro assumptions, tax buoyancy assumptions or nominal GDP denominators.

“But you must remember that current finance minister [Malusi Gigaba] wants to remain finance minister and I think he wants more out of politics going forward. This means that he does not want to be the demise of South Africa, he does not want to go down as the guy who came out with his first budget and caused a downgrade. So, in a way, the medium-term budget needs a lot of fine-toothed combing.