Cliffhanger: The elation of Jacob Zuma’s supporters following the abortive no-confidence bid may be short-lived if Moody’s decides to downgrade the country on Friday.
No confidence. This summed up consumer and investor sentiment in the country ahead of this week’s motion in Parliament against President Jacob Zuma. And it is expected to prevail, in what are likely to be a few very fractious months leading to the ANC’s December elective conference, when it will finally address its leadership impasse. And it’s likely to prevail in the economy.
South Africa returns to “a negative status quo with a deeply split ANC incapable of undertaking any reform or provision of regulatory or policy certainty”, as Nomura analyst Peter Attard Montalto put it.
The voting outcome suggests “more of the same muddling through”, said Iraj Abedian, chief executive of Pan-African Investment and Research Services.
Despite an initially frothy market reaction ahead of the count, which was quickly reversed, economists believe that October’s medium-term budget policy statement will be a far more important test for South Africa’s economic future than Zuma’s victory this week.
This is which the government will have to outline concrete plans to manage the country’s finances in a context of poor economic growth, pressured revenues and governance and mismanagement fallout at several state-owned enterprises.
The no-confidence vote result could also affect Friday’s anticipated decision by ratings agency Moody’s on whether to downgrade South Africa’s sovereign rating.
In the current environment it was unlikely that the necessary structural reforms and policy certainty would emerge at a time when key political decision-makers were more preoccupied with domestic politics than with economic and policy management, said Raymond Parsons, an economist at North-West University’s school of business and governance.
“Policy and political uncertainty should thus, for the present, be seen as the ‘new normal’ for South Africa and business strategies need to be adapted accordingly,” he said.
The only clear bearing the unsuccessful motion of no confidence had on the economy is the performance of the rand, said Thabi Leoka, an economic strategist at Argon Asset Management.
“The rand’s reaction was an indication of market expectation. Leading up to the vote it was stronger — implying the market was hoping for Zuma to be removed. Afterwards the rand weakened quite a bit, so the market was disappointed by the outcome,” she said.
After the unexpected announcement on Monday afternoon that the ballot would be secret, the currency strengthened from R13.36 to R13.14 to the dollar on Tuesday — but when the motion against Zuma failed, the currency slid back and settled at R13.39 to the dollar on Thursday morning.
South Africa’s 10-year bond yield (a benchmark that indicates the government’s cost of borrowing) also improved before the vote, dropping from 8.64% to 8.54%, but it fell back to previous levels when trading resumed on Thursday.
In the first quarter of the year, South Africa slipped into a technical recession after two consecutive quarters of negative growth. Employment numbers reflect the decline, at record levels of 27.7%.
Economists differ on whether South Africa will escape the technical recession in the coming months. But even if this does happen, most agree that economic growth will remain at very low levels.
October’s medium-term budget policy statement will be the next major opportunity to boost certainty and credibility in policy, Parsons said. This will be the first budget presented by Finance Minister Malusi Gigaba, and a major test of the government’s commitment to fiscal discipline and budgetary constraint.
The risk posed to the fiscus by ailing state-owned enterprises has increased in recent weeks. Last month, SAA was provided with a R2.3‑billion cash injection, with further aid likely to be required, and power utility Eskom released financial results that show a decline in profitability of more than 80%.
Contingent liabilities in the form of guarantees to parastatals are nearing the R500‑billion mark. At the same time, some large state-owned firms are having difficulty raising money as appetite for the bonds stalls.
The policy statement will be the first time Gigaba furnishes details on how he plans to accommodate expenses — particularly those arising from poorly run parastatals — and indicates how the budget could be realigned and just how damaging it might be, said Leoka.
Recent positive developments such as the appointment of Vuyani Jarana as chief executive at the embattled airline did not mean much yet, she noted. “We are yet to see what it means in terms of cleaning up SAA — cleaning up meaning it requires less intervention financially … so we can’t link the appointment of a [chief executive] to an improvement in our fiscus,” Leoka said.
Unexpected expenses notwithstanding, just finding the money for the government’s existing funding commitments is a worry, she added.
“Revenue collection is still lagging and it is a concern. We will still get colour on that at the MTBPS [medium-term budget policy statement] in October.”
With investment levels at all-time lows, rising unemployment and faltering consumer confidence, the upcoming budget policy statement will be “by far the toughest we have faced since the late 1990s”, said Abedian. The outcome of Tuesday’s vote meant the same ministers, with the same “failed policies, are going to continue with little prospect of turning the economy around”.
“With no credible solution for the prevailing recessionary situation, the prospects for the actual and expected fiscal revenues are likely to be gloomy,” Abedian said.
Whether the vote’s outcome will influence Moody’s decision on Friday remains to be seen.
Ratings agencies “don’t look at one indicator or a political outcome”, Leoka said, noting the result of the vote in Parliament was unlikely to influence the agency’s decision. Any such decision would instead be based on South Africa’s progress in economic growth and, right now, “we are still in the doldrums”, she said.
The agency may wait until after the budget policy statement to gain clarity on the health of economy before making its decision, Leoka noted.
But Abedian said Zuma and the Cabinet had little appreciation of the economic and investment complexities facing the country. The speed with which they “respond to the challenges, and the manner in which they frame the problems, is deeply problematic”, he said.
The Moody’s decision was bound to “highlight the ineffectiveness of the policy framework”, Abedian said, adding that it would “be highly unlikely” that Moody’s could continue its “wait-and-see approach”.