Montalto: Budget failed to remove downgrade threat

Cape Town - Finance Minister Pravin Gordhan may have made all the right noises in his National Budget speech but shifts in government attitude and genuine reform are needed to remove the junk status threat from South Africa, according to an emerging markets analyst.

Nomura economist Peter Attard Montalto said Gordhan used his eloquence to reach both foreign investors and his local audience. "Pravin Gordhan’s speech came across as expected as highly credible rhetoric focusing on and making the right noises, sounding investor friendly from a high level," said Montalto.

READ: Budget in a nutshell

"He delivered strongly on a conservative fiscal tone, bringing in the budget deficit profile inside what was projected at the MTBPS (mini budget), reaching a primary surplus in the next 2016/17 fiscal year." Montalto remarked that Gordhan clearly has much room to manoeuvre in pushing through wide-ranging budget cuts and reprioritisations.

"However, he did not choose to, or did not have the space to, go further on tightening fiscal policy and hence expenditures still increase and debt levels are not held below 50%," said Montalto.

Turning to parastatals, public-private partnerships were highlighted although Gordhan avoided talk of privatisation and wider restructuring. "Greater auditing of all state contracts, including parastatals, over R10m is very welcome and a sign of the Treasury’s increasing ability to shine a light on procurement," said Montalto. However, he pointed out the heightened political risk this carries, as for example "outsized costs paid to politically connected tenderpreneurs" come into question.

Montalto welcomed calls for a minority stake in South African Airlines but felt greater detail was necessary to make a real assessment on how parastatals are going to change.

He said the Budget Speech showed that Gordhan is incapable of announcing the kind of wider micro-economic structural reforms that will boost medium-term growth and bring back investor confidence. Investors and ratings are looking for "difficult medium-run reforms that create positive sentiment now and will boost actual and potential growth in the long run", said Montalto.

He critised the budget for containing "too many appeals to NDP (national development plan) implementation and uniting behind NDP as a common plan", adding that it lacked "convincing detail to suggest a change in the way the rest of government thinks about the economy and boosting growth".

Said Montalto: "The list given in the Budget Review of supposedly growth-boosting measures is old and has been repeated many times." He still feels that although the NDP is a "great plan", it does not have the broad spectrum support it needs from ANC partners and all parties in government.

No' rabbit out of a hat' moment

National Treasury "has no new wider political space on economic policy, which is unsurprising but confirmation and a negative to the market". Markets were waiting for a strong signal after President Jacob Zuma's lacklustre SONA but there was no "rabbit out of a hat” moment.

"The National Treasury and Pravin Gordhan have much greater control over the narrative of government now in this ratings risk world; they are trying to encourage greater interactions between government and business but the payoffs in this policy about-face is not there in the budget," said Montalto.

While Treasury has in the past shown skill in creating budget reviews aimed at rating agencies, it now faces a much larger challenge. Rating agencies will have kind words for the difficult cuts and revenue raises, and generally be content with the short-term fiscal position.

But "The issue that the National Treasury did not address in the budget was keeping the rating agencies happy with growth-related measures... As such, we believe they will be disappointed and highlight this". Zuma's comments that Des van Rooyen was the most qualified person to be appointed to the position of finance minister is a further indication that there has been no fundamental shift in thinking, said Montalto.

READ: DA slams Zuma's 'unwise' Van Rooyen remarks

He therefore believes that ratings agencies will stick on the path toward sub-investment grade after this budget. "So our forecast after today remains unchanged – for S&P to downgrade to sub-investment grade in December 2016 and Moody’s in June 2017. Both can happen faster on a bigger negative growth shock or a fiscal shock," said Montalto.

ALSO READ: Moody's happy with tax, worried about growth

* Visit our special issue on Pravin Gordhan's 2016 Budget Speech.

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