Moody's looks to Pravin for market confidence

12 February 2016

Cape Town – Ratings agency Moody’s is waiting for more detail in Finance Minister Pravin Gordhan’s Budget speech this month to determine if South Africa “will succeed in steadying (market) confidence”, it said on Friday.

Kristin Lindow, Moody’s senior vice president and lead sovereign analyst for South Africa, said in a statement that President Jacob Zuma's State of the Nation speech acknowledged the country's “deep economic challenges and provided hints of future budget savings”.

South African investors were watching the address with piqued interest, because the right move from Zuma could ensure the country remains out of "junk status", while the wrong move would plunge the country into the sub-investment grade status that would have perilous consequences on the economy's GDP. 

The reaction by rating agencies like Moody's, S&P and Fitch is seen as crucial to the country's short-term economic outlook.

Lindow said Zuma's speech “notably” included the privatisation of state-owned companies and the unification of the two capitals.

“While Mr Zuma has proposed setting up another panel to address the economy's malaise, the markets’ attention in the short-term will turn to the 2016/17 Budget being tabled on February 24 and whether the measures announced will succeed in steadying confidence.”

It came as little surprise that Zuma dedicated most of last night’s address to South Africa's dire economic situation, blaming its low GDP growth mainly on global circumstances. He was, however, vague on how the ship should be turned around – a task that will fall squarely on Gordhan’s shoulders.

Last night, Zuma repeatedly made reference to Gordhan’s upcoming budget speech. “It was almost as though he had deferred the real meat to his finance minister,” political analyst Daniel Silke said.

“Perhaps Sona should’ve been renamed ‘Prelude to a Budget’ as that now will be the speech to watch.”

Peter Attard Montalto, executive director and senior emerging markets economist at the Japanese investment bank Nomura, said in a company note that Zuma’s speech itself had very little substance. “The broad sense was of a speech written in parts heavily by National Treasury to make the right noises.”

But Montalto didn’t think Gordhan yields nearly as much power over government policy as some people may think. “The question will arise of whether everything is being left up to Pravin Gordan and his budget … We doubt that.”

Kevin Lings, Stanlib economist, told Fin24 that he got the sense Gordhan will back up of some of Zuma’s utterances about the sale of non-core state-owned enterprises and more detail on spending cuts across government.

“The finance minister will probably set out the fiscal policy and clarify some of the issues Zuma alluded to,” he said.

NKC African Economics said in a company newsletter that the real test of government’s strategy to turn things around will be when Finance Minister Pravin Gordhan takes stage to deliver his first budget speech since his bizarre return to top job at National Treasury.”

RMB economist John Cairns said on Friday that the address “barely met the grade for talking the talk, never mind showing that the government is set to walk the walk. Minister Gordhan, all eyes are now on you.”

This article first appeared on Fin24, see here.