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Rating firms eye mini budget amid Treasury capture reports

Oct 02 2017 06:25
Lameez Omarjee

Johannesburg – Reports that National Treasury has been captured will be cause for concern for rating agencies, said an analyst.

According to a report by City Press, several senior officials at Treasury claim that Finance Minister Malusi Gigaba has been establishing a parallel administration within the department.

Other claims indicate that Gigaba brought nearly 20 staff with him when he joined Treasury and that he does not consult with deputy directors general on important decisions. Cabinet also announced that the budget allocation process would shift to the presidency for the 2018/19 financial year, City Press reported.

“We are really seeing the capture of National Treasury at different levels,” said Professor Jannie Rossouw, head of the School of Economics and Business Science at Wits University. “Effectively we see the capturing of Treasury which we have been worried about since Minister Pravin Gordhan left.”

He explained that it is disconcerting to find that the Presidency will be taking over a major function of Treasury, especially as the country is running a huge deficit and may approach a fiscal cliff by 2026. “[President Jacob] Zuma is stealing the future of our children at this point in time,” he said.

“The next generation must be extremely concerned about the future.”

The medium term budget policy statement (MTBPS, also known as the mini budget) will be an “exceptionally important” document that will be dissected by South Africans and rating agencies, he said. “South Africans must brace themselves for massive tax increases.”

He also raised concerns over South African Airways (SAA) which recently received a R3bn bailout to stop the national carrier from defaulting on a loan from Citibank. The funds were transferred from the National Revenue Fund (NRF).

“Why do we need to keep SAA at all costs?” Rossouw asked. “There is no economic sense in keeping SAA.”

Economic Strategist Thabi Leoka from Argon Asset Management, said that reports suggesting the capture of Treasury will not be good from the perspective of rating agencies. “Institutions are important and the independence of institutions is important. The mandate of National Treasury is very important,” she said.

“If they [Treasury] do not stick to their mandate or stick to the estimates set out in the budget, we will have problems with rating agencies.”

If rating agencies believe that the institutions are weakening to such an extent that it will impact on Treasury’s ability to shrink the budget deficit and stick to its mandate, then they could act accordingly as was seen when they downgraded the credit rating in April.

“Developments were so bad it compromised on the economy,” said Leoka.

“The developments that happened in the past and the past couple of weeks are not good for the mini budget.” Details around the health of state-owned enterprises as well as the financing of SAA are to be announced at the mini budget. Rating agencies could act on an unsatisfactory mini budget, she explained.

However, things are more difficult than they were before as there are different curve balls to consider, explained Leoka. Political and institutional erosion makes it difficult for analysts to predict what rating agencies will do, it is not simply a matter of calculating revenue and a possible shortfall, said Leoka. 

At Moody’s Sub-Saharan Africa Summit held in September, Zuzana Brixiova, vice-president and senior analyst of the sovereign risk group, noted that the strength of the country’s institutions had previously been a distinguished feature. But developments over the past year are starting to erode the institutional framework, she said, referring to the attack on the Reserve Bank’s Constitutional mandate as one example.

Brixiova said that there is no particular strength or weakness that stands out for the country. Moody’s has rated South Africa one notch above sub-investment grade at Baa3, with a negative outlook.

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