Donna Block
Foreign investors this week gave Minister of Finance Trevor Manuel’s budget speech the thumbs up, noting that it appeared designed mainly to secure a credit upgrade from leading rating agency Standard & Poor’s.
“All in all this has been a very market friendly, economically orthodox budget,” said one London banker. But, he added, “is it enough to get that investment grade rating”? Most overseas economists think it is, but what really matters is if S&Pdoes. The rating agency is due to announce its revised grade for South Africa in the next couple of weeks, having postponed the decision so that it could peruse Manuel’s 2000 budget.
Economists in London and New York agreed that the 2000 budget was designed for growth but more specifically to get that investment grade rating. Such a rating would allow United States pension funds to invest a higher portion of the assets they manage in South African markets. Not only would an investment grade rating put the country in a better position to attract foreign portfolio investment, it would also cut down on the cost of South Africa’s borrowing and allow the country to finance increased levels of investment, which in turn would create more jobs.
The most important aspect of the 2000 budget for foreign investors was the moderate liberalisation on of exchange controls. The relaxation of exchange controls would be a significant factor in attracting foreign investment and economists agree it will encourage foreigners into the market.
One London-based Africa watcher said that the tax reforms, the fiscal discipline and the modest relaxation of exchange controls will be very positive for the rand as there wouldn’t be much capital outflow. “We’ve already seen the rand strengthening since the end of Manuel’s speech and capital flowing into the markets, and that’s very positive,” he added.
Foreigners were disappointed that the 2000 budget did not have more detail regarding the sale of state assets and the privatisation programme in general. The continued restructuring of state assets would bring international shareholders into the country.
The introduction of inflation targeting was viewed soberly. The target was set by the government in consultation with the Reserve Bank with the aim of keeping prices stable and increasing the transparency of monetary policy. Investors had mixed reactions to the target spread of 3% to 6%.
“It’s okay,” said one New York trader. “It will give the Reserve Bank some slack so they will be able to achieve their targets by 2002 and we view this as generally good.”
Other economists are a bit more pessimistic and feel the target will be difficult to achieve.