South Africa: New Leadership, New Fiscal Position

It is now widely believed that South Africa’s newly-elected president, Cyril Ramaphosa, will ride the exit of Jacob Zuma to show a more sustainable fiscal position for the country. It is also now no longer expected that global ratings agency Moody’s Investor’s Service (MIS) will downgrade South Africa’s credit rating to junk this month.

Cyril Ramaphosa speaks at a press conference in London, Sept. 25, 2017

The Ramaphosa regime will likely ride the “Zexit” wave, using the budget as an instrumental turning point to move South Africa to a more sustainable fiscal position. Recent statements from Finance Minister Malusi Gigaba show the new budget will be “tough”—reducing the budget deficit and stabilizing the debt trajectory. “We believe the budget will broaden the tax base, with value-added taxes rising from 14 percent to 15 percent and expanding to include fuel,” John Tate, a research assistant with Continuum Economics wrote in a note to clients this week. “The burden of adjustment will likely fall on the asset-rich—we also expect the capital gains tax and estate duty to increase”

“In our view, raising revenue in a progressive manner will be a key policy goal because of the multi-millionaire Ramaphosa’s perceived disconnect with the average South African.”

We also expect the budget to rein in spending, with an adjustment likely to the terms of free higher education. Contingency plans for vulnerable State-Owned Enterprises (SOEs)—notably Eskom, the cash-strapped state power utility company—will likely be announced, with moves to address further governance issues.

Given his legitimacy as a reformist president, it is now widely believed Ramaphosa’s budget will contribute to avoiding the downgrade by Moody’s. Consequently, South Africa will not be expelled from the Citi WGBI, supporting the rand’s recent strength and removing the need for a reactionary hike from the South African Reserve Bank (SARB).

JSE Seeing A Surge

The recent surge in the Johannesburg Stock Exchange will be short-lived. The normalization of developed market rates will eventually expose the fundamental weaknesses of the South African economy. Moreover, the adjustment to a more sustainable growth path will initially be rocky, which could exacerbate divisions within the ANC and complicate a likely cabinet reshuffle.

While reviving the suffering mining sector is a low-hanging fruit that can be accomplished easily, a number of market participants believe replacing Mineral Resources Minister Mosebenzi Zwane, a Zuma loyalist, will likely be a task too great for Ramaphosa to overcome. The country also faces many structural and institutional problems aside from the mining industry.

If Ramaphosa improves the resiliency of the economy, he may be able to avoid a future Moody’s downgrade. However, a number of market analysts maintain the view that Ramaphosa’s success is unlikely given the structural problems facing South Africa’s economy.

“However, we believe a Moody’s downgrade is inevitable in the future due to the economy’s still-weak fundamentals,” Tate said.

Photo Credit: Associated Press