Coalition details won't impact rand much - report

16 August 2016

Cape Town - The formation of political coalitions after the local elections should be concluded this week, but their details would not matter much for the rand, international market research company Citi Velocity said on Monday.

In its view, this is because the rand has already sailed over the "election-hurdle and the next big local hurdle might be the general policy response".

Citi Velocity pointed out that such a general policy response will take some time to come to light, but that some market participants could already be concerned about the cost of “bold actions” as recently indicated by the National Executive Committee (NEC) of the ANC.

The NEC has indicated that it has unanimously agreed to take collective responsibility for the poor performance of the ANC during the elections and resolved to take "immediate and bold actions" to address the weaknesses and shortcomings that led to the decline of electoral support.

NEC action 'no surprise'

Citi Velocity is not surprised by the NEC’s decision to take collective responsibility - and not blame President Jacob Zuma - for the marked loss of support during the elections. The research company pointed out that this, however, could imply that the ANC struggles to build coalitions with minority parties which have been critical of Zuma.

Another issue requiring a policy response is the issue that no-fee increases at universities should remain in place to give a chance to a consultative engagement with all stakeholders in order to arrive at an economically viable and affordable cost of higher education.

National Treasury has indicated that it has not budgeted for another year of zero fee increases and that it would not be sensible to borrow to fund such a project.

"We think the tabling of the mini budget around the end of October could be instrumental in gauging the general policy response," said Citi Velocity.

It pointed out that the primary credit rating agencies’ responses to the election outcome have been mixed. Fitch highlighted increased 'risk of populist policies'; S&P indicated that there is a risk that political brinkmanship could move focus away from the economy, although the agency does not expect a populist policy response; while Moody’s said that the trend whereby voters increasingly hold the government accountable for implementing pro-growth-oriented policies could “support strengthening of credit quality over the medium term”.

Treasury response

The National Treasury responded to the rating agencies’ comments by reaffirming Government’s fiscal policy stance as articulated in the 2016 budget.

"But with gross domestic product (GDP) likely to remain stagnant in 2016 - the SA Reserve Bank is forecasting 0% growth compared to Treasury's initial forecast of 0.9% growth - and inflation likely to undershoot Treasury’s forecast (6.8%), the projected compression of the budget deficit - from -3.9% of GDP in the 2015/16 financial year to -3.2% of GDP in 2016/17 financial year - is probably only possible if there are additional revenue streams and/or expenditure cuts," said Citi Velocity.

In its view, VAT and other tax increases remain likely, but it thinks reform of state-owned companies — SAA in particular — might be one of the most effective ways to pull the fiscal equation back on track.

"Reform of SAA, for example, would not only explicitly lighten the burden on state coffers, we think it would also suggest that Finance Minister Pravin Gordhan’s power has increased relative to the time of the tabling of the 2016 budget," said Citi Velocity.

"At this point in time the positives of policy continuity under Gordhan’s watchful eye outweighs the negatives from economic underperformance, in our view."

Earlier this month emerging markets economist Peter Attard Montalto of Nomura said the markets will realise later this year that Zuma is not as weak as they currently see him as a result of declining urban support of the ANC in the local government elections.

Montalto painted a scenario where, despite positive receptions from markets after the local elections, there comes a change of heart later this year, which will likely include a ratings downgrade in November and December.

This article first appeared on Fin24, see here.