Finance Minister Nhlanhla Nene resigned from his position on 9 October 2018 after testifying to the Commission of Inquiry investigating widespread corruption in government. He has been replaced by Tito Mboweni, former governor of the South African Reserve Bank.
Langelihle Malimela, senior research analyst at IHS Markit, unpacks what these moves mean for South Africa’s economic ratings.
The change coincides with growing focus on the details of the government’s ambitious economic recovery plan, due for release in the Medium-Term Budget Policy Statement slated for 24 October 2018.
Tito Mboweni’s appointment as finance minister is likely to be well-received by the markets given his experience and good track record in his previous role as governor of the South African Reserve Bank. The Medium-Term Budget Policy Statement (MTBPS) will be a key indicator of South Africa’s fiscal policy direction in the one-year outlook.
Fiscal policy is unlikely to change significantly under Mboweni, and he is likely to place emphasis on tightening government outlays across the public sector: additionally, the success of the upcoming MTBPS will be determined by how a ZAR400-billion infrastructure fund will be financed.
If the MTBPS were poorly received, particularly regarding the government’s ability to restrict expenditure, a Moody’s ratings downgrade to sub-investment grade is highly likely.
IHS Markit expects Mboweni to follow a conservative path and to seek to instil fiscal discipline across government, in a similar manner to that previously expected of the former finance minister Nhlanhla Nene (2014–15).
Mboweni is regarded as highly competent by our financial-sector sources and markets thus are likely to respond well to his appointment.
He is also unlikely to depart from the policy path outlined by President Cyril Ramaphosa in his State of the Nation Address. A crucial test for both Mboweni and Ramaphosa will be the detail of the MTBPS.
Mboweni now needs to bring greater clarity to the economic stimulus and recovery plan outlined by Ramaphosa on 21 September 2018. We expect markets to focus heavily on how the plan will be funded.
Mboweni’s appointment prior to the MTBPS does increase the likelihood of the speech being postponed by no more than two weeks. IHS Markit economists do not expect that such a delay will have an adverse effect on the markets; although a delay of a month will be viewed negatively and likely give the market the impression that there is disagreement over policy.
However, it is highly unlikely that Mboweni will significantly depart from the plans prepared by Nene for the MTBPS, nor do we expect him to depart from the broad outline set out by Ramaphosa for the economic stimulus and recovery plan.
While investors are likely to assume that this year’s fiscal deficit target of 3,6% and spending target of 33,3% of GDP will be exceeded, the MTBPS will need to outline clearly how expenditure will be controlled going forward.
A key priority for investors and the ratings agencies is whether public-sector expenditure can be reined in during 2019 and thereafter, with details of how Ramaphosa’s infrastructure fund will be financed also representing a major concern.
Ramaphosa has already stated that of the R400-billion, R50-billion will come from reprioritising the existing budget. It has not been made clear where the remaining funding will be sourced, but it appears likely that some will come from the $14,7-billion pledged by China ahead of the Forum on China-Africa Cooperation (FOCAC) at the start of September.
Overall, IHS Markit’s economists assesses that markets recently have tended to view South Africa as leaning towards populist policies, and if this were reinforced by the MTBPS, it would be likely to trigger a ratings downgrade by Moody’s, the only ratings agency that has not yet downgraded the country to sub-investment grade.
Moody’s is due to announce a review of its outlook for South Africa on 12 October 2018. A loss of South Africa’s investment grade or cross-over rating status will lead to significant portfolio outflows and currency depreciation and avoiding this is likely to represent a government priority.
In summary, timing for the MTBPS, its content, and the specific funding arrangements for infrastructure development will be the key indicators for policy direction, fiscal stability, and currency movements in the coming months.
If the MTBPS goes ahead on 24 October and markets do not react well to the funding plan for the economic stimulus and recovery plan, this will heighten the risk of a ratings downgrade by Moody’s.