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Political manoeuvring likely to spur downgrades by year-end

Citi expects FY17/18 budget shortfall of R33bn, says MTBPS must be gone through with a fine-tooth comb.

Increased political manoeuvring could subject South Africa to more credit ratings downgrades by year-end, an economist said after President Jacob Zuma’s latest cabinet reshuffle.

Zuma on Tuesday announced six changes to his cabinet including in the key higher education and training, energy and home affairs departments. The surprise reshuffle, the second of the year, has again raised concerns over political and policy certainty.

A previous cabinet reshuffle, which saw Pravin Gordhan fired as finance minister in late-March, triggered sovereign ratings downgrades to sub-investment grade by S&P and Fitch in April. Moody’s cut its rating to one notch above junk with a negative outlook in June. The ratings agencies have since warned that “political noise” could detract from the implementation of growth enhancing reforms.

According to Gina Schoeman, a South Africa economist at Citi, the baseline scenario is for S&P to downgrade in June but it may do so earlier if pushed. She told journalists that the ratings agency – being ahead of the curve – is not in a rush to make a decision especially as their negative outlook on the sovereign only expires in April next year.

“The reason they are not in a rush is because they still have to make the correct decision and that means they want as much information as possible. Until last week I would have told you that it is a close call for November 24 for S&P but I believe they want to see the outcome for December and how this impacts the February budget,” she said referring to the ANC’s December conference in which it is to elect a new party leader and possible presidential candidate for the 2019 national election.

She went on to add that February’s budget will be the most important indication regarding the trajectory of fiscal policy and that it would likely be influenced by the outcome of the ANC’s elective conference. “The October budget [Medium-Term Budget Speech – MTBS] is just an update and the finance ministry will only present what it is comfortable with particularly given the political situation.”

By Citi’s estimates, which take into account revenue collection from March to July 2017 as a percentage of the latest budget estimates, a shortfall of R40 billion in main budget revenue for the 2017/2018 financial year is expected. However, strong seasonal revenue collection in the second half is to reduce this to a R33 billion shortfall, which would equate to a budget deficit of 4.3% provided expenditure remains the same. Should expenditure, currently running R22 billion below target on a year-to-date basis, be cut by R25 billion the budget deficit would be 3.7%.

“The finance ministry looks at all these scenarios and I don’t think that they are happy to print a main budget deficit ratio this year with a four in front of it. If they were on 3.5% for the current fiscal year, I don’t think they have the appetite to go as high as 4%. So certainly, they are going to have to do something [and] whether that something is less realistic macro assumptions, less realistic tax buoyancy assumptions, less realistic nominal GDP denominators – we won’t know until we see the budget.

“But you must remember that our current finance minister (Malusi Gigaba) wants to remain finance minister and I think he wants more out of politics going forward. This means that he does not want to be the demise of South Africa, he does not want to go down as the guy who came out with his first budget and caused a downgrade. So in a way, the medium-term budget needs a lot of fine-tooth combing but it does suggest that we will have to wait until February to find out what is actually at play.”

She said the things that “haunt” fiscal policy currently are contingent liabilities presented by state-owned enterprises and public sector wage negotiations, due next year. “Both those things are political decisions so to be fair to National Treasury itself both those things are out of their control. And that is why the December outcome is important because whoever is elected as head of the ANC, and likely of the country depending on how 2019 goes, will or will not work with the finance minister to apply pressure to the public sector wage negotiations,” she said.  Currently, public sector wage increases of CPI + 0.5% are largely unaffordable, she added.

A monthly Citi ANC leadership survey, in which it asks eight leading political analysts and political journalists who they believe is currently in the lead for the ANC presidency in 2017, puts Deputy President Cyril Ramaphosa ahead of Nkosazana Dlamini-Zuma. ANC Treasurer General Zweli Mkhize is fast emerging as a compromise candidate.     

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As mentioned some time ago, the real boss of the country is not the President or the cabinet but the economy. It controls everything and cannot be fiddled. No use trying to fight it, we have to be competitive in all aspects, education, efficiency, sustainability, protection of the environment and with a strong human side for social stability.

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