What Lies Ahead?
Key Events that Could Affect the South African Economy
26 October: Pravin Gordhan's Medium-Term Budget Policy Statement
Embattled South African Finance Minister, Pravin Gordhan, will make his “mini-budget” presentation to Parliament next week Wednesday. The ANC’s National Executive Committee has called for the budget to be “reprioritised”, but indications are that Gordhan will resist pressure to adopt populist measures. The ratings agencies will be listening for any hint of an increase in the budget deficit that could lead them to downgrade South Africa, while thousands of protesting students will want to know how the treasury can make their dream of free tertiary education a reality. Poor economic growth is not making Mr Gordhan’s job any easier and this speech comes at a critical economic and political juncture. No pressure!
(CNBC Africa, Engineering news, Fin24)
2 November: Pravin Gordhan in Court on Fraud and Theft Charges
Exactly one week later Mr Gordhan will be court with co-accused former SARS director Ivan Pillay and commissioner Oupa Magashula regarding the approval of Pillay’s early retirement and extended employment within SARS. According to Cathleen Powell, Senior Lecturer in Public Law at the University of Cape Town (apparently its still in one piece), “the weaknesses of the case are so glaring that any vaguely competent criminal lawyer should have been able to spot them”. Ms. Powell believes that Mr Gordhan cannot be guilty of theft because he did not take the money that was paid out for Mr Pillay’s benefit. The state would then need to show that Mr Gordhan “unlawfully and intentionally made a misrepresentation which caused prejudice or potential prejudice to the state” in order to prove fraud. Mrs Powell argues that the Public Service Act allows an executive authority to approve early retirement and points out that there were 3,000 previous early retirement cases. She also identifies the procedural flick flacks that NPA Chief Shaun Abrahams must have pulled off in order to prosecute the case. These severely undermine Mr Abrahams’ assertion that there was no political pressure to lay charges against Gordhan. President Zuma and the Cabinet have nominally given Gordhan their support, but I would be surprised if this whole thing just magically disappears.
(The Conversation, Daily Maverick, IOL, Bloomberg, EWN)
22- 24 November: Reserve Bank Monetary Policy Committee Meets
In its last monetary policy statement the Reserve Bank indicated that it “may be close to the end of the tightening cycle”. This could of course all change if the rand tanks on the back of the events above or a US interest rate rate (Fed meets in early November).
(South African Reserve Bank)
25 November: Moody’s Update on SA’s Credit Rating
Unfortunately it is not possible to do things like burn down universities, nearly bankrupt state owned enterprises and charge your Finance Minister with fraud and expect there to be no consequences. We start to find out what those consequences could be towards the end of November when Moody’s announces its review of South Africa’s investment grade credit rating. Moody’s has SA’s rating at two levels above “junk” status (Baa2 –ve outlook) and commented that there is only around a 1/3 chance that SA could be downgraded. What happens with Gordhan and the budget speech will be critical to the outcome. The other important point is that Moody’s have moved coverage from long serving Kristin Lindow to a new analyst. It will be interesting to see whether the new analyst plays it safe or announces her arrival with a bang. My bet is on a one notch downgrade (i.e. to one level above junk, but still investment grade).
(Reuters, Trading Economics)
2 December: S&P Update on SA’s Credit Rating (followed shortly by Fitch)
The fun really starts in early December when S&P announce their decision on SA’s credit rating. S&P (and Fitch) has SA just one notch above junk status and is likely to be more aggressive than Moody’s when making a decision (S&P were the first major agency to downgrade Brazil). We've argued again and again that ratings agencies are the "tail and not the dog" i.e. a country gets a bad credit rating because of political turmoil and poor economic prospects, not because the ratings agencies are mean and nasty. Investors are not blind either. The risks of a downgrade are well understood and should already be reflected in the value of the rand and the stock and bond market prices. If South Africa does get downgraded it will be bad news rather than a complete catastrophe. For example, the Brazilian Real fell nearly 30% in the year before the country got downgraded to junk, but only 1.3% on the day that S&P made its surprise downgrade. The Brazilian stock exchange also only fell by 0.33% on the day. To be very clear though, a downgrade will be very bad for South Africa, it will increase our borrowing costs, hurt investor confidence, slow the economy and make it more difficult to government to roll out development projects to grow the economy and uplift the poor. It therefore makes a lot of sense to stop the political shenanigans and give Minister Gordhan some real support.
Fasten your seat belts!
DR ANDREW LOUW CFA