Ratings agency S&P Global Ratings (S&P) has taken a more sober view of the ANC’s election drubbing than the markets, which have rallied strongly on the belief that the government will respond by instituting growth and investment-friendly reforms.
S&P also does not share Moody’s enthusiasm that the bruising the ANC took will accelerate economic reform momentum in the run-up to the 2019 national elections.
While Moody’s expects the body-blow taken by the ANC to make it more responsive to voters’ and the economy’s needs, S&P fears that political contestation will rise within the ANC and between it and opposition parties, distracting it from economic issues.
In June, S&P kept SA’s foreign currency rating at BBB-, the bottom rung of the investment grade ladder with a negative outlook, signalling that it could lower SA’s ratings this year or next if policy measures did not turn the economy around.
S&P associate director Gardner Rusike told Business Day he expected no change in the short term. S&P’s base case is still that the government will pursue the structural reform agenda it had previously set out.
This includes moving ahead with labour market reforms aimed at reducing the severity of strikes, as well as providing legislative clarity on mining transformation.
However, over the medium-term, he expected the introspection caused by the ANC’s poor election performance to prompt it to rethink the economic policy path already agreed to. This raised the risk that reform momentum could slow, he said.
For a long time, the ANC had enjoyed a comfortable majority and had been delayed in undertaking pro-growth economic reforms by its alliance partners, explained Rusike. What had changed was the possibility that the ANC could lose its majority in the next election. However, the party leadership remained the same.
“They have been hesitant to make significant structural reforms and we can’t give them the benefit (of the doubt) now that, suddenly, they are going to make big economic policy changes and transform the economy.
“If anything, political contestation is going to increase within the ANC and between the ANC and opposition parties rather than a focus on the economy,” Rusike said.
This is certainly not the view taken by financial markets, which have rallied on the election outcome. The rand ended last week at R13.72/$ — its strongest level on a closing basis since October 2015 — some months before the Nenegate debacle.
“This is the best possible outcome,” said Citi economist Gina Schoeman of the election result.
“For foreign investors in particular, the municipal election results have made them feel somewhat more comforted that SA is a true democracy with people speaking out.”
With the results showing that President Jacob Zuma had been a liability for the ANC, Schoeman expressed the view common in financial markets that he would be sidelined and unable to wield the same power as previously.
However, Nomura economist Peter Attard Montalto cautioned that, while Zuma had been weakened, this did not mean that pro-growth reforms were now firmly on the cards. While he did not see the ANC shifting to the left, he expected the tug-of-war between the reformists and Zuma’s own faction in the ANC to continue to stymie any real economic progress.
On a more positive note, Rusike gives no credence to fears that Fitch Ratings expressed on Friday that the government was at risk of going on a populist spending spree to try to win back voters.
“Our view is that the government will stick to its fiscal consolidation targets and there won’t be any reflection of a populist policy response, given that the National Treasury has been resolute in what they want to achieve. “I think we can give them some credit there,” he said.
Treasury director-general Lungisa Fuzile reiterated the Treasury’s commitment to fiscal discipline in an interview with the Business Times at the weekend, saying: “I’ve got no reason to expect that the fiscal consolidation trajectory would be disturbed or derailed”.
57 700 000 (mid 2018 estimate)
4.9% y/y in September 2018 (CPI) & +6.2 y/y in September 2018 (PPI)
-0.7% q/q (2nd quarter of 2018)
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