NeneGate: Bearish economist warns optimistic investors

Cape Town – Boasting that South Africa’s economy has rewound to pre-NeneGate is unwise, as economists’ risk narrative of South Africa on December 8 was not exactly peachy.

That’s the message from London-based emerging markets economist Peter Montalto of Nomura, who met with parastatals, asset managers and other leaders in South Africa recently.

He said while South Africa could have hit rock bottom in terms of its risk profile, economists should think how far off the bottom that is.

“Our view is that we have rewound to 8 December - but not before,” he said in commentary on Tuesday, saying Nomura was seen by local investors to be more “bearish” in their narrative.

This was the day before President Jacob Zuma “fired” Finance Minister Nhlanhla Nene for allegedly stalling key “Zumanomic” projects such as the nuclear new build programme and the proposed SAA Airbus swap deal.

Montalto said Nomura’s message at this time about “the grinding underperformance narrative, the slow grind to junk rating (and) the lack of enthusiasm for structural reform outside the Treasury” remained the same.

“What we now have is a risk narrative, where there are two-way risks, but pricing out all risk … seems inappropriate.”

He said short-term upside surprises are possible, including on growth and announcements from the interactions between government and business. He said South Africa was on the same path as December 8 and “potential growth will not rise above 2.5%”.

SA companies insulated from ratings downgrade

Montalto said parastatals, banks and corporates have been insulating themselves from ratings downgrades, such as renegotiating credit contracts.

“We are therefore a little more secure in our view that the ‘macro-financial nexus’ (as the IMF calls it) between ratings and the economy is not a huge concern, though clearly the likelihood of volatility and increased funding costs (for private and public sector) are still there.”

Montalto found little room for optimism on specific reforms, and said he disagreed with those who felt Finance Minister Pravin Gordhan had “special tools to use on microeconomic structural reforms”.

“Gordhan’s power comes from the way he was appointed, and also from his convening power to bring together business and government and his skills at PR and message management to try and stir sentiment (or at least provide a floor under it).

“However, we still do not believe that President Zuma either has the ability or the inclination to direct the rest of government along a reform path of deep microeconomic structural reforms such as meaningful labour market policy loosening or fundamental changes to education policy or even BEE.

“Some quick wins are possible, but even here we think momentum is lacking. There will be further meetings between the president and representatives of business and Pravin Gordhan in the coming weeks that may yield some positive headlines.

“However, implementation remains key and is what we watch for, along with a detailed timetable of the implementation guide to hold government to account.”

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