Cape Town – Markets that are nervously watching as South Africa tilts on the precipice of “junk status” are too focused on the country’s short-run fiscal developments ahead of Treasury’s Budget on February 24, according to Nomura emerging markets economist Peter Attard Montalto.
“Markets are overplaying the importance of short-run fiscal developments as opposed to longer-run growth prospects and structural reforms, in the sub-investment grade narrative, and as a result have very high expectations,” he said in a report on Monday.
“These expectations are particular focused among local market participants and have been emphasised continually by the government,” he said.
Nomura believes that the lack of microeconomic structural reforms is the real cause for long-run growth concerns and long-run fiscal and debt worries.
Montalto said Finance Minister Pravin Gordhan will deliver fiscal conservatism in his Budget, “but with so little fat left on the bone to be cut in future years that this will be the end of the road”.
He said while “spin may win the day at least in the short run”, Nomura expects rating agency commentary after the event to be important for the market.
The “Budget should be judged through a ratings and therefore long-run growth lens to see whether (it has) real (positives)”, he said.
As a result, Montalto expects the rand to only weaken further in the second half of the year, while he sees ratings agency Standard & Poor’s (S&P) lowering South Africa to sub-investment grade (junk status) in its December rating review.
Following the Budget, S&P will “wait and judge” what progress is made in the first half of the year, looking at growth numbers, the current account, wage round labour relations and other factors, said Montalto.
Moody’s will likely downgrade South Africa in the second quarter as a result of President Jacob Zuma’s disastrous firing of Nhlanhla Nene’s and short-lived replacement of Des van Rooyen, as well as the lower growth forecast, said Montalto.
“It will be interesting to see if the State of the Nation and Budget can delay Moody’s until the fourth quarter,” he said.
While the Budget’s fiscal policy will be geared towards what the rating agencies are looking for, Treasury doesn’t fully understand the importance of microeconomic structural reforms, said Montalto.
This is “much more important for securing the ratings than simply fiscal policy or rhetoric”.
Treasury also doesn’t realise “that it has the political capacity to be able to move in that space of structural reforms”.
He said Treasury believes it can give enough to the rating agencies with its deficit profile being at or even a little better than the Medium Term Budget Policy Statement in October, in a much lower growth environment.
“Cutting through heavy spin, the Budget will fail to deliver credibly on a wider, pro-growth, microeconomic structural reform path and that the National Treasury’s political space does not extend that far,” he said.