Gigaba appointment 'a threat to fiscal discipline' - analyst

Cape Town – Newly-appointed finance minister Malusi Gigaba is not necessarily the worst choice for the position as he has a fair amount of policy-making experience, although very little in the fiscal space, according to Jeffrey Schultz, economist at global bank BNP Paribas. 

President Jacob Zuma replaced key ministers in a Cabinet reshuffle late on Thursday night, most notably Finance Minister Pravin Gordhan with former home affairs minister Gigaba and Deputy Finance Minister Mcebisi Jonas with ANC MP Sfiso Buthelezi. 

A word on the new appointees

Schultz said the removal of Jonas was not a surprise and his replacement (Buthelezi) – an economist and former fund manager – is rumoured to be “unsettingly” close to the Gupta family.

“There seems to be a clear lack of experience among many of the new Cabinet ministers appointed," Schultz said. "What’s worse is that President Jacob Zuma has not taken the opportunity to remove underperforming ministers such as Faith Muthambi (previously in Communications and now shifted to Public Service and Administration), Mosebenzi Zwane (Mineral Resources) and Bathabile Dlamini (Social Development).”

READ: Gigaba deployed to Treasury for Guptas - Save SA 

Adrian Saville, chief strategist at Citadel, concurred that Gigaba has no financial or business experience. “Put bluntly, confidence in Gigaba's leadership at National Treasury is likely to be low given his insipid performance as minister of public enterprises and the visa fiasco that transpired under him as minister of home affairs. 

“He is widely regarded to be a Zuma loyalist. As such, his appointment represents a direct risk to the institutional strength and fabric of National Treasury and the maintenance of the fiscal discipline that is Gordhan’s hallmark.” 

He sees Buthelezi’s appointment as deputy finance minister as “less surprising”, given the fact that he was widely touted for the position beforehand. “Buthelezi is a seasoned politician, qualified economist and comes with business experience that includes having served as chief operations officer and director of the Makana Investment Corporation – an investment vehicle for ex-political prisoners, particularly those from Robben Island.”

READ: Former Prasa board chair Sfiso Buthelezi named deputy finance minister 

BNP Paribas’ Schultz found it “interesting” though that SACP-aligned ministers (Rob Davies in the Department of Trade and Industry, Ebrahim Patel in economic development and Blade Nzimande in higher education) have all retained their ministerial positions. “[It’s] undoubtedly a strategy by the president to lessen the blow from within the alliance structure.” 

Junk rating on the cards

Schultz was of the view that the implications of the reshuffle, involving particularly the finance minister and his deputy, will have negative repercussions for the country’s investment-grade credit rating.

“We believe that S&P (Standard and Poor’s) will be the first to downgrade the sovereign’s long-term BBB- foreign currency rating to ‘junk’. The agency is also likely to act soon (in the next few days or week) and not wait until its next scheduled ratings review in early June.” 

Moody’s is scheduled to deliver its next review on April 7, which will also most likely result in a downgrade from the current Baa2-rating by one notch, keeping its outlook negative.  

Citadel’s Saville said of the three big agencies, S&P has been the most vocal about South Africa’s credit risk by far. Although their next decision is scheduled for early June there is a chance that the agency’s announcement could be brought forward to an earlier date. 

READ: Junk status on the cards after Zuma's night of long knives 

“Notwithstanding growing references to radical economic transformation, it is unlikely that we will see any substantial shift in policy in the near term,” Saville said. 

“Still, the growing rhetoric and nature of Zuma’s actions are likely to lead ratings agencies – and market actors – to regard South Africa as a greater investment risk at the end of this week than it was at the start. As a result, there is now a greater probability that Zuma’s actions will galvanise S&P into downgrading South Africa’s debt to sub-investment grade, perhaps as soon as mid-year."

Market fallout 

The rand, fixed income markets and the financial indices (banks) obviously stand to be hit most severely hit in the short term, Schultz said.
 
“Importantly though, the market blowback (on) Friday morning’s announcement has not been as severe as Nenegate in December 2015, when the rand lost around 7% against the US$ since its lows of 12.31/USD (reached on Monday, March 27). 

“This we believe speaks to the more positive macro picture in SA and globally presently (higher terms of trade, low current account deficit and expectation for real policy rates to continue to look appetising).”

Schultz said although it is “too early” to predict what the events mean for gross domestic product growth and activity, the fixed and foreign direct investment climate looks to worsen in the near term.

READ: JSE bloodbath as SA's top four banks plunge more than 5%

The market’s attention is now likely to shift to how severe the blow-back is likely to be on Zuma. Unlike December 2015, Schultz deems it unlikely that Zuma will be forced to reverse his decision.

“Expect more volatility and noise in the currency and fixed income markets as this story develops,” Schultz said. “The weaker Zuma is perceived by markets, the more likely that buying opportunities in the ZAR will emerge, we believe.”

Saville added that in the immediate term, South Africa should brace for currency weakness and market impacts in the form of the “re-pricing” of financial assets, including South African bonds and domestic banks. “No doubt, there will also be a lot of noise to deal with as politicians deliberate, the country digests and markets decide.”