WHAT SA’s markets need more than anything else from Finance Minister Pravin Gordhan in his budget speech on Wednesday is to restore confidence in the country’s economy, traders and analysts say.
Confidence in the economy was shattered in December when President Jacob Zuma replaced former finance minister Nhlanhla Nene with David van Rooyen, and then almost immediately replaced Mr van Rooyen with former finance minister Pravin Gordhan.
Mr Zuma’s timing could not have been worse, says IG SA markets analyst Shaun Murison. SA’s credit rating from leading rating agencies had already slumped to perilously low levels when the Nene debacle unfolded. Now the chances of a further downgrade to junk status have never been greater.
A downgrade will increase SA’s cost of borrowing, says Mr Murison, and is a circumstance that Mr Gordhan will be hard-pressed to avoid.
Mr Zuma’s state of the nation address on February 11 did little to reassure the markets. The speech provided no new confidence-boosting initiatives and, in several important areas, glossed over local problems, Barclays Research analysts say. In the days following his speech, the JSE retreated, albeit amid decidedly risk-off global trade levels.
Barclays says there had been elevated expectations for the state of the nation address, given that the Presidency said it would focus on the economy. Now investors are probably hoping that Mr Gordhan’s 2016-17 budget will do a better job of providing some concrete measures and boosting confidence.
The outlook for growth, as revised by the World Bank and the International Monetary Fund (IMF) as well as the Reserve Bank, is significantly lower as a result of domestic and international economic duress. It means Mr Gordhan faces the prospect of designing a budget that will need to help keep SA out of what many market players expect will be a recessionary environment.
Nedbank head of strategic research Mohammed Nalla says markets need to be apprised on the finance minister’s reform policy and that Mr Gordhan needs to illustrate delivery on promises of fiscal consolidation, rather than "mere platitudes and assurances".
Investors want the government either to scale back on ambitious and fiscally expensive projects such as National Health Insurance (NHI) and/or to announce a formal process for greater public-sector engagement in projects such as the nuclear-build programme with the emphasis on public-private partnerships. Plus, says Mr Nalla, any other encouraging signals to the private sector, such as a reduction of red tape and the introduction of labour market reforms will be well received.
"If the budget is credible and not premised on overly optimistic forecasts and assumptions, it should prove supportive of the rand and of the bond and equity markets by way of general sentiment. The longer-term direction of asset classes will, however, remain a product of delivery on promises as well as global overarching factors."
Macquarie Bank economist Elna Moolman says a combination of spending cuts and tax increases will be needed. Rating agencies, she says, ideally want to see convincing commitments from the government to improve the general environment for growth and doing business in SA.
Investec Asset Management economist Nazmeera Moola says many investors are concerned about the country’s growth prospects.
The most prominent question seems to be whether SA will lose its sovereign bonds’ investment-grade credit rating and be downgraded to junk, she says.
SA is rated by three major rating agencies. Moody’s rates SA’s sovereign credit rating at Baa2, with a negative outlook. Fitch rates SA at BBB-, but with a stable outlook. Fitch’s rating is just one notch above speculative grade. Of greatest concern is Standard & Poor’s rating, which is one notch above speculative grade at BBB-, with a negative outlook.
A downgrade by the latter will see SA’s rating fall to speculative grade or junk, which will raise the cost of borrowing for the government and all local companies that borrow on world markets.
In the immediate aftermath of the finance minister shuffle, investors were "clearly rattled", judging by the sharp weakening of the rand and the sell-off in bonds, Ms Moola says.
Even now, with an experienced and trusted hand back at the helm of the Treasury, the rand is still significantly weaker than at the beginning of December and bonds are still weaker than before Mr Zuma’s announcement, she says.
This is partially due to a deterioration in the global economic environment, but "we believe it is mainly the result of a loss of trust in the Treasury and the South African Reserve Bank", she says.
Despite global developments, emerging market issues and SA’s own challenges, such as concerns over electricity supply and disappointing growth, SA is still viewed as the "least ugly girl at the ball", she says.
Investors are cognisant of risks pertaining to emerging markets and SA, but were reassured by the belief that SA has strong structural institutions in the Treasury and Reserve Bank, which are expected to do the right thing.
It will take a long time to rebuild the trust in these institutions, which has been badly shaken in one quick move by Mr Zuma’s announcements in December, says Ms Moola.
All may not be lost. Since mR Gordhan’s reappointment, he has reiterated his commitment to retaining SA’s investment grade rating.
The first step will be the presentation of a plausible 2016 budget to Parliament on Wednesday.
To buy time with the rating agencies, Mr Gordhan needs to produce a far smaller budget deficit for the fiscal year — beginning on April 1 — than the 3.3% of gross domestic product the Treasury announced in the October medium-term budget policy statement, Ms Moola says.
The Treasury is facing lower revenues than it has forecast previously. To produce a lower deficit, the minister will have to raise taxes and cut expenditure. In an already weak economy, this will not be easy to achieve.
Furthermore, with municipal elections looming, there will be the temptation to distribute some largesse. Unfortunately the cupboards are bare, and there is room for only symbolic largesse.
Mr Gordhan will also have to provide continued assurance that SA will not incur any major long-term liabilities that are not funded. Ms Moola knows the minister cannot produce a great budget, but is hoping for "a reasonable budget".
If the government implements structural reforms, these should go a long way towards easing the pressure on SA’s sovereign bond ratings.