Why rating agencies downgrade SA

Jan 22 2013 19:55
Peter Attard Montalto

Police hold their rifles during clashes with residents of the Zamdela township in Sasolburg. (AFP)

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Cape Town - The fact that violence can escalate over an issue that seems so small shows the underlying social tensions and risks that the rating agencies highlight and keep the rating bias to the downside.

This was the view of Nomura strategist Peter Attard Montalto on the increasingly violent Sasolburg riots.

In his daily insights on emerging markets, Montalto said the protests are not about the labour market or service delivery ("though unemployment and service delivery are catalysts in our view"), but are about a redrawing of municipal boundaries that has not even been finalised yet.

Not only does it highlight the underlying social tension in South Africa, but also the strong risk of violence around mining sector divestment and other labour issues, as well as the lack of leadership of either the central or provincial government in this and other cases of violence. 

Traditionally, Montalto said, the ANC, unions and other local groups would have been able to quell this sort of outbreak or prevent it from occurring in the first place, but that is no longer possible as social ties and traditional social structures have broken down.

"Also, under the surface service delivery protests continue, but without drawing significant media attention so that they have become accepted in some sense.

"Counting these is very difficult, but in the third and last quarters of last year there was the largest number of distinct protests and also the most violent service protests since 2004.

Citing statistics from the University of the Western Cape (UWC), Montalto said about 760 separate protests have occurred between January 2009 and November 2012 - many lasting several days.

The police, who use a looser definition of service delivery protests, show around 700 protests occurring last year alone.

The police and UWC agree that last year saw a step change in violence levels, with protests now more likely to become violent than not, said Montalto, highlighting that the Sasolburg riots have become increasingly violent with police stations and police officers’ houses being ransacked and looted, as well as pitched battles.

Montalto said the trend is going in the wrong way, fed by "real" unemployment (ie from the formal sector) being around 38%, and with violence becoming more accepted and effective (in achieving higher wages, though not really in better service delivery).

"We think talk of (national development plan) NDP  implementation is too long-term and too slow – even if it was successful – to make a meaningful difference in the short term."

Montalto said political leadership is necessary to fill the vacuum and establish trust, but it is sorely lacking.

He said the direct economic impact of such protests is very hard to gauge, but may explain why potential growth is only around 3.7% over the medium run, with the balance of risks being slower still.

"Within this environment we think populism means things like greater resource nationalism and probably higher corporate tax rates in the budget too."

Montalto said that for now markets seem largely immune to the daily ebb and flow of headlines on these issues, "perhaps having largely priced it in".

"However, bond flows by foreigners have become more volatile in recent days, with large outflows at the end of last week, but recovered by a significant inflow yesterday (Monday)."
Montalto said the  global liquidity market reactions are likely to remain muted with continual net inflows until there is a more dramatic risk premia shock – most likely on the resources nationalism/Anglo Platinum story.

However, additional rating agency comments (as opposed to action) around the time of the budget next month may impact the bond market, he said.

*Peter Attard Montalto is an emerging markets economist at Nomura. Opinions expressed are his own.

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peter attard montalto  |  sa economy



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