Market jitters after Gigaba talks
FINANCE Minister Malusi Gigaba’s maiden Medium Term Budget Policy Statement (MTBPS) fell short of expectations with a glaring lack of solutions to the country’s fiscal problems.
Instead, his MTBPS sent jitters into the market and heightened chances of ratings downgrades.
Gigaba branded his speech candid and frank. Yet he chose to walk on eggshells where it mattered most.
It is, however, difficult to overlook the context in which Gigaba delivered the speech.
He had the misfortune of delivering probably the most difficult MTBPS less than two months before the potentially divisive ANC national conference in December.
He was therefore unlikely to go out on a limb and pull a rabbit out of his hat. Instead of providing clarity, the MTBPS raised more questions than answers.
Take the sale of the government’s 39 percent stake at Telkom, for instance.
The country now knows that the sale is definitely on the table. But no one knows how much the government is willing to sell and whether it has identified a vehicle where the shares will be kept as Gigaba said the state would buy them later.
Would they be “parked” at the Public Investment Corporation (PIC)?
To his credit, Gigaba was brave enough to face the nation and deliver the bad news that the reservoir is empty. He had no choice.
But what he lacked were clear commitments. He was anything but persuasive.
“It is not in the public interest, nor is it in the interest of government, to sugar-coat the state of our economy and the challenges we are facing.
“It is only when we understand these challenges fully and candidly that we will know what to do and can decide what course we must take in addressing them, as well as what trade-offs we must make in the national interest,” he said.
For him, it was about laying bare the known. His attitude was: “You do not like what you see, too bad.”
But the market was not forgiving. Instead of instilling confidence, the statement unsettled the market and the rand tanked, remaining under pressure well into the end of the week.
Remember, S&P Global and Moody’s Investors Service are due to review South Africa’s credit rating next month.
Economists think that a downgrade is looming. “Moody’s and S&P’s negative outlooks signal that the next rating move will be a downgrade.
“We expect to get Ba1 for South Africa’s long-term local and foreign currency sovereign debt Moody’s ratings (currently Baa3). We expect a downgrade to BB+ for South Africa’s long-term local currency sovereign debt S&P rating, and the risk of BB for South Africa’s long-term foreign currency sovereign debt S&P rating (currently BB+),” said Investec chief economist Annabel Bishop.
In its last review, S&P’s had warned that it would consider lowering South Africa’s ratings if fiscal and macroeconomic performance deteriorated substantially.
“While the agencies are set to review South Africa’s credit ratings in the last week of November, the agencies can move before then on the ratings, or may wait until the end of the year, or early next year, to deliver a downgrade, given the negative outlooks and concomitant warnings,” said Bishop.
However, she said the timing of a downgrade was “less certain”.
With the ANC elective conference in December, the agencies might wait for the outcome of the conference before downgrading the country’s rating.
On Thursday, Fitch said the MTBPS was an indication of a change in direction of policy away from a focus on fiscal consolidation, as it had anticipated as a consequence of March’s cabinet reshuffle.
“It’s occurring faster than we’d expected.”