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Inside SA's Pandora's box

Dec 15 2015 07:59
Peter Attard Montalto

Cape Town - Although President Jacob Zuma is weakened, we still do not expect him to be ousted at least in the short term, said Nomura International's emerging markets economist Peter Attard Montalto.

Montalto expects Zuma to still attempt to reach the same end points on nuclear tendering and SAA, but now via a different and likely longer route. "Pravin Gordhan may be a roadblock on these matters."

READ: Pravin Gordhan: Let's get down to business

Fundamentally, Montalto said, Nomura still thinks South Africa is heading for sub-investment grade, even under Gordhan.

Despite lower growth and Gordhan's inability to define political space for microeconomic reforms ("as was the case when he was Minister before"), Montalto remains confident on the fiscal situation in the short term at least.

But where are we exactly? Montalto elaborates:

Markets’ trust has been knocked by three Finance Ministers in one week, the lack of communications and explanation by the President and the dramatic volatility. We believe part of this loss of trust will be permanent.

Pandora’s box of the long-run risks on South Africa has been opened, even if we now have taken a slight step back. Volatility risk premia and uncertainty risk premia as a result have increased and not reversed course today (Monday) completely.

While the return of Pravin Gordhan is very welcome, especially on the fiscal situation, we need to be aware of how the National Treasury (NT) operated under him last time around. Minister Gordhan is well known with investors, a personality (and reaction function) we understand and very much a pragmatic political operator.

This caused issues in the past when he first arrived at the NT, but now both sides know each other and the challenges much more acutely. However, the challenge is a lot harder now than when he was last in the role up until the May election last year.

First, growth expectations have fallen sharply and will likely drop further.

Second, expenditure cuts are getting closer to the bone. We still believe, as with Nhlanhla Nene, that he will have a very difficult challenge to get the fiscal situation under control in the interim and room for counter cyclicality has ended – especially as a Fed hiking approaches.

More generally we do not believe that Pravin Gordhan will have any different capacity to command political space within the cabinet on pushing microeconomic structural reforms compared with his last period in the role. The NT’s space here will remain tightly confined.

As such with fiscal and contingent liability risks rising and still no change on the lack of reform momentum to boost growth we believe South Africa is still firmly on track to sub-investment grade. True it might not be such a steep and dramatic road as we were commenting on at the end of last week – but the road is still the same as we outlined after the Fitch and S&P rating action through the start of last week.

Put simply we do not believe Minister Gordhan will alter that end point. Rating agencies may wait until after the budget and give some benefit of the doubt, so again timing shifts a little.

The political backdrop

However, the wider politics remains important, especially on nuclear and SAA. We think Minister Gordhan’s appointment was a knee-jerk reaction to a flurry of representations to ANC leadership and the President on Sunday morning.

The long-silent balancing function suddenly came to life. The impact on wealth, pensions and savings etc was too great to ignore, as well as the fact that the left-wing and conservative centre-left of the ANC came together to condemn what happened.

However, the President clearly believed he had the political power to take the action he did in firing Mr Nene last Wednesday evening. We think the reaction of the ‘silent’ factions of the ANC, show a finer balance between the left/conservative-centre-left and the tenderpreneurs than we would have said on Friday, but the delicacy of this balance and the President’s beliefs in his power remain a deep concern.

This is why we need to think about some of the basic axioms of the South Africa story and see where we are at:

• “The ANC is a broad church but within internal stabilisation mechanisms” – still true but we think more so now and clearly cannot prevent damage. It may force change to the correct moves however. That said, David van Rooyen is now Minister of Cooperative Governance (local government basically) after swapping with Minister Gordhan. This is a very important Ministry to be led by someone with no executive experience that had to stand down as an executive mayor before.

• “Treasury and SARB are sacrosanct” – that axiom has been broken, even if Pravin Gordhan is now in place. The fact that the President took this decision shows he does not believe in their importance. The SAA and nuclear stories will be important on this front. We believe SARB independence issues and a change in mandate change risks a move back into the ‘beyond the forecast horizon’ bucket from being more 2016 risks at the end of last week.

There remain outstanding questions on SAA and the nuclear situation. The Minister’s rhetoric was effective today at his press conference. He mentioned rating agencies, investor confidence and the expenditure ceiling etc. However, while saying that Mr Nene’s decision to block the SAA deal still stands – he did keep the door open to changing the decision (if there were representations and after meetings with SAA). This is worrying. We will watch 21 December deadline for SAA very closely.

Equally, on the nuclear situation he is severely constrained by last Wednesday’s decision at the cabinet meeting to move forward to nuclear tendering without an NT sign-off on cost benefit analysis and affordability. Such a move will put him in a difficult position as he is well known for being anti-nuclear. This shows the knee-jerk nature of his appointment and the risks of conflict with the President.

READ: Alleged nuclear move stinks of corruption - Green Bishop

More broadly, President Zuma has been clearly weakened by this U-turn, even if it is being presented as listening and acting on representations. Yet it is still very difficult to see him being recalled by the ANC.

President Zuma commands a very strong majority in the NWC and a majority in the larger NEC groupings of the ANC. We think it would take a significant shift by his regular supporters to oust him. Nevertheless, there is a risk of recall. A more likely baseline for now may be that he continues along until 2017.

Cyril Ramaphosa’s stock in that race has probably risen, especially if he was instrumental in the turnaround over the weekend. However, the close balance in the ANC means the race is still open.


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