'SA still on road to sub-investment grade'

Despite Pravin Gordhan’s return as Finance Minister‚ South Africa is still on the road to sub-investment grade‚ believes well-known economist Peter Attard Montalto.

Attard Montalto‚ who is an Executive Director and Senior Emerging Markets Economist and Strategist at the Japanese investment bank Nomura covering South Africa as well as Emerging Europe‚ also believes part of the markets’ loss of trust in South Africa after the axing of Finance Minister Nhlanhla Nene and his replacement by ANC backbencher David van Rooyen last week is likely to be permanent.

“Pravin Gordhan has returned as Finance Minister in what appears to be a rapid Sunday turnaround by President Jacob Zuma in response to previously ‘silent’ elements of the ANC providing a strong and sudden push back. Although President Zuma is weakened‚ we still do not expect him to be ousted at least in the short term. We think he will attempt to reach the same end points on nuclear tendering and SAA‚ but now via a different and likely longer route. Pravin Gordhan may be a roadblock on these matters.

“However‚ fundamentally we still think South Africa is set on the road to sub-investment grade‚ even under Pravin Gordhan. Despite lower growth and his inability to define political space for microeconomic reforms (as was the case when he was Minister before)‚ we remain confident on the fiscal situation in the short term at least‚” Attard Montalto said in a note on Monday.

He noted that the markets’ trust in South Africa had been knocked by three Finance Ministers in one week‚ the lack of communications and explanation by the President and the dramatic volatility.

“We believe part of this loss of trust will be permanent. Pandora’s box of the long-run risks on South Africa has been opened‚ even if we now have taken a slight step back. Volatility risk premia and uncertainty risk premia as a result have increased and not reversed course today completely‚” he added.

While the return of Pravin Gordhan was very welcome‚ especially on the fiscal situation‚ one needed to be aware of how the National Treasury (NT) had operated under him last time around‚ Attard Montalto said.

“Minister Gordhan is well known with investors‚ a personality (and reaction function) we understand and very much a pragmatic political operator. This caused issues in the past when he first arrived at the NT‚ but now both sides know each other and the challenges much more acutely.

“However‚ the challenge is a lot harder now than when he was last in role up until the May election last year. First‚ growth expectations have fallen sharply and will likely drop further. Second‚ expenditure cuts are getting closer to the bone. We still believe‚ as with Nhlanhla Nene‚ that he will have a very difficult challenge to get the fiscal situation under control in the interim and room for counter cyclicality has ended – especially as a Fed hiking approaches‚” Attard Montalto opined.

“More generally we do not believe that Pravin Gordhan will have any different capacity to command political space within the cabinet on pushing microeconomic structural reforms compared with his last period in the role. The NT’s space here will remain tightly confined. As such with fiscal and contingent liability risks rising and still no change on the lack of reform momentum to boost growth we believe South Africa is still firmly on track to sub-investment grade.

“True it might not be such a steep and dramatic road as we were commenting on at the end of last week – but the road is still the same as we outlined after the Fitch and S&P rating action through the start of last week. Put simply we do not believe Minister Gordhan will alter that end point. Rating agencies may wait until after the budget and give some benefit of the doubt‚ so again timing shifts a little‚” Attard Montalto added.