TITO TIMES TWO
Stakes are high as ratings agencies look for stability, economic growth
Tito Mboweni is tipped to stay on as finance minister in President Cyril Ramaphosa’s slimline new cabinet. Earlier this year, Mboweni told economists he would not return to the National Treasury after the elections, but he later backtracked. This week he refused to deny speculation by economists and analysts that he would extend his seven-month tenure. “It has not been offered to me. It’s speculative,” he said. Moody’s, the credit ratings agency, warned this week that the composition of Ramaphosa’s new administration, expected to be unveiled after his inauguration on Saturday, would be a key factor in its decisions on SA’s rating.
● Expectations are rising that finance minister Tito Mboweni will be returned to the portfolio when Cyril Ramaphosa announces his new cabinet, but the maverick minister is keeping tight-lipped.
Mboweni declined this week to comment on the selection process or whether he would make himself available for another term as finance minister. “It has not been offered to me. It’s speculative. I don’t want to get involved with that.”
The stakes are high for Ramaphosa and he will need to be confident that the finance minister he chooses can stabilise the country’s finances — saving SA’s last remaining investment-grade rating.
Continuity in the finance ministry will be key given that over the past five years SA has not had a finance minister who has delivered on the fiscal framework. “In other words, one who has presented a budget in February that was seen through in the following three years,” Maarten Ackerman, chief economist at Citadel, said this week.
Ramaphosa is widely expected to appoint a market-friendly finance minister. Mboweni’s first budget, delivered in February this year, was considered to be a business-oriented one that eschewed populism and attempted to avert a further ratings downgrade.
“It will augment the confidence and trust if he can be the person to see it through. Another change of finance minister would mean it takes longer to get traction on the implementation of policy, and the markets are unlikely to find that favourable,” Ackerman said.
Daniel Silke, a political economy analyst, said there was “no shortage of people” from which Ramaphosa could pick a new finance minister.
Reserve Bank governor Lesetja Kganyago, former deputy finance minister Mcebisi Jonas and Gauteng MEC for finance Barbara Creecy have been mentioned as potential candidates. However, Kganyago has previously said he was not interested in the position, and Jonas has recently been appointed as chairman-designate for MTN.
Mboweni told economists at a colloquium earlier this year that he would not return after the elections, but he later backtracked on his statement.
Silke said even though Mboweni was considered “unorthodox and maverick” he was a “known quantity” who in the seven months as finance minister was given the leeway to raise discussions on policy reform and topics that the ANC was not willing to deal with publicly, for example “a different relationship between the state and SOEs [stateowned enterprises]”.
Ramaphosa told CEOs and investors this week that the new cabinet would focus on the implementation of the National Development Plan. Among his early interventions are plans for an SOE council, which he will chair. He said the council would give him “line of sight” over SOEs.
He is also reviving a policy and research advisory unit which will report to him. The details of who will serve on these two structures has not been disclosed.
International credit ratings agency Moody’s noted this week that it was watching to see the composition of the incoming administration and the policies it will pursue to address key credit challenges.
The challenges relate to improving potential growth through reforms that lift productivity, enhance competitiveness, raise investment, reverse a rising debt trend and restore institutional strength.
Lucie Villa, a Moody’s vice-president, senior credit officer and lead sovereign analyst for SA, said: “Fading prospects of policies that will sustain fiscal and economic strength, alongside any sign of diminishing resilience to shocks, would put downward pressure on the country’s rating.”
Only Moody’s still holds SA on investment grade.
S&P Global Ratings, which is scheduled to update the sovereign debt rating on Friday, downgraded the foreign and local currency
It has not been offered to me. It’s speculative. I don’t want to get involved with that Tito Mboweni Minister of finance
ratings to junk in 2017. It was followed by Fitch Ratings in the same year.
Economists believe S&P will hold the current junk rating and stable outlook until the new cabinet is unveiled.
Ackerman said: “If S&P were to change the outlook now, it could only be based on the improvement in sentiment, and I think it is too early to bank on that.”
The rating would be revised upwards if fundamental changes were evident, but there were none, with Eskom’s funding requirements posing further risk to the rating, he added.
Weakness in SA’s fundamentals is forecast to continue.
Moody’s warned on Wednesday that without policy measures that bring the deficit down from its recent levels of 4.5%5% of GDP, the debt-to-GDP ratio would likely rise to 65% of GDP by 2023, or more than 70% if Eskom’s guarantees were included.
Moody’s said “the government will need to overcome spending pressures relating to interest and wages, together with obstacles to raising further revenues including from the diminishment of Sars’s capacity under the Zuma administration”.
Growth, which according to Moody’s is much lower than SA’s peers with similar income levels, is expected to have been “very soft” in the first quarter of this year after severe load-shedding, weak mining and manufacturing data and depressed confidence.
Elize Kruger, a senior economist at NKC African Economics, said NKC is expecting a contraction of 1.5% quarter on quarter. For the year it forecasts growth of 0.8% compared to S&P’s prediction of 1.8%. Low growth would negatively impact SA’s revenue collection potential in this financial year.
GDP data for the first quarter will be released on June 4.
“Thus with a downward revision to S&P’s 2019 growth imminent, S&P would likely take a conservative approach on South African ratings at this review,” Kruger said.
Amid such weak economic growth, SA’s unemployment rate deteriorated further to 27.6% from 27.1% in the first quarter of 2019, Stats SA said on Tuesday. The broader measure of unemployment, which includes discouraged work seekers, is at 38%. This means 9.9-million South Africans are now unemployed, and among young people aged 15-24 years, 55% do not have jobs.
Given the weak environment, the Reserve Bank is expected to keep the repo rate unchanged at 6.75% on Thursday — although that might offer some respite it will be insufficient to spur demand in the economy.