Nenegate: Investors question govt decision process

Jan 07 2016 19:18
Carin Smith

Cape Town - Local and global investors will continue to question the South African government’s process of decision making, which has created further ambiguity around economic policy in an already fragile growth environment, according to economists Herman van Papendorp and Sanisha Packirisamy of Momentum.

They say this is as a result of the so-called Nenegate, which erupted when former minister of finance Nhlanhla Nene was fired by President Jacob Zuma.

David van Rooyen, who was appointed in Nene's place, was soon replaced by former finance minister Pravin Gordhan.

Moreover, a more benign structural growth outlook leaves SA’s fiscal authorities with less room to manoeuver, suggesting a significant threat to Treasury’s fiscal consolidation timeline and medium-term debt stabilisation plan.

READ: Nenegate drives business confidence to pre-democracy low

"Reneging on government’s expenditure ceiling remains a trigger for further negative ratings action as this would extend fiscal consolidation timelines and prevent a stabilisation in the debt ratio," they said.
"The appointment of Mr Gordhan as finance minister, following the controversial decision to replace the widely-respected Nene with (the) relatively unknown Van Rooyen, should see some stabilisation in investor sentiment and market prices."

Capital flows to emerging economies have contracted as a share of gross domestic product (GDP) more recently and any faster-than-anticipated increase in US short rates could spur a broader retreat in flows to emerging markets, according to Van Papendorp and Packirisamy.

They pointed out that countries with large external requirements and those with significant dollar debt burdens remain vulnerable to the US Fed rate hiking cycle.

READ: AA: Petrol price hit by Nenegate rand meltdown

"In the past, developing countries benefited from higher US rates which accompanied stronger growth activity and rising inflation. This time around, however, emerging markets face the headwinds of sluggish global trade and benign commodity prices given less commodity-intensive Chinese growth prospects," they explained.

"Moreover, higher US borrowing costs pose a risk to growth and default rates in developing economies as emerging market corporates with a large exposure to dollar-denominated debt are forced to pay more to service their debts."

As for local economic developments in South Africa, they said the downgrade by Fitch ratings agency of SA’s long-term sovereign debt rating to BBB- from BBB and a revised outlook from a negative stance to stable, indicates a lower likelihood of an imminent downgrade to non-investment grade status. Fitch also highlighted the extent to which policy uncertainty and investor-unfriendly proposals have weakened business confidence in SA.

Van Papendorp and Packirisamy said rating agencies Fitch and S&P alluded to the likelihood of lower potential growth going forward, particularly as a lack of policy implementation to address SA’s structural problems continues to inhibit higher trend growth in a muted commodity price environment.

ALSO READ: BRILLIANT: John Battersby unpacks Nenegate, Jacob Zuma's greatest blunder

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momentum  |  investments  |  sa economy



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