Cape Town - The Cabinet reshuffle by President Jacob Zuma at the end of March was likely the worst point in South Africa's gradual deterioration this year, Nazmeera Moola, co-head of fixed income at Investec Asset Management, told Fin24 on Thursday.
In her view, that was the point at which SA’s problems tipped over from being manageable to being very significant. Several downgrades also followed.
Moola explained that SA has seen a gradual deterioration - both internationally and locally - over the course of the last couple of years.
A lack of liquidity in state-owned companies and a loss of confidence among businesses and consumers, are other consequences she mentioned. This resulted in a lack of fixed investment by the private sector.
"The single thing we need to do is restore confidence and start off with the household sector. Given the problems we have seen both in the private and public sectors, its difficult to tell households 'don’t worry, please go spend some more money'," said Moola.
"They’re looking at Eskom or what's happening at Steinhoff and wonder 'is there anything we can cling to as a source of safety and surety at this point in time'?”
Moeshfieka Botha interviews Nazmeera Moola, co-head of fixed income at Investec Asset Management:
MB: This seems to have been a very hellish financial year. Where did it all go wrong – and where do you see us heading?
NM: It didn’t all start in 2017. There’s been a gradual deterioration both internationally and locally over the course of the last couple of years. Donald Trump was elected in November 2016. We came into the year with Donald Trump as America’s president – and every absurd action he’s taken since then has only fed into the problems we are facing worldwide, in terms of the geopolitical environment.
But locally, I think the worst point for me was the Cabinet reshuffle at the end of March. That was the point at which South Africa’s problems tipped over from being manageable to being very significant.
We had several downgrades follow. We’ve seen parastatal companies like Transnet which could issue in the local markets earlier, just being unable to issue. Complete lack of liquidity in the state-owned company space – and then the biggest problem is this loss of confidence we’ve seen - both by households and by companies – and that’s resulted in a lack of fixed investment by the private sector.
But by the household sector, individuals are are just not spending as much as they would have previously. And that’s resulted in weaker growth and tax collections.
MB: Weaker growth is a problem. What could we be doing there?
NM: The single thing we need to do is restore confidence and start off with the household sector. Given the problems we have seen both in the private and public sectors, its difficult to tell households: "don’t worry, please go spend some more money”. They’re looking at Eskom or what's happening at Steinhoff and wondering “Is there anything we can cling onto as a source of safety and surety at this point in time?”
MB: South Africans have the expectation that things are going to get better. People are going to step up. The Eskom board is going to change. Yet, no one seems to be stepping up really making the change. Do you see a change coming and do you see us recovering as a country?
NM: I think we need to get the ANC elective conference out of the way. What’s happening right now, particularly in the public sector space is complete sclerosis. Nobody knows what is going to happen at the ANC conference - so as a result, nobody wants to make any decisions, nobody wants to take any risks and there’s a vacuum in leadership.
As a result the key economic decisions that need to be made – for example, an Eskom board with some credibility – they are just not getting made. So we get this holding pattern board that was recently appointed, which consists mostly of the old board.
MB: There was no real change, just as with the mini budget. There was nothing concrete – telling us what we need to do to get our economy back on track.
NM: All the mini budget did was market the fact that tax revenues were going to disappoint. For anything else to happen – you needed the rest of cabinet to make decisions, to decide if they were brave enough to implement a VAT hike, or significant spending cuts - or whatever it was that was going to help compress this large fiscal deficit… and there was just no willingness to do that.
Then, two weeks after the mini budget, we suddenly have the president talking about free higher education – without taking any budgetary processes into account. You have a budgetary process which would have kicked off in June/July – and if free higher education was a priority for the president – it should have gone into that process.
We should have made decisions as a country on what we were giving up in order to fund free higher education. I’m not against making tertiary education affordable, but it needs to be done in the context of a sound budget process – because right now it’s not affordable.
The only reason we have been able to finance a budget deficit this year is foreign investors have pumped $65bn into emerging market local currency debt through the course of 2017.
Of that, South Africa is roughly 10% benchmark, so call it $6bn – that's what has funded our budget deficit. If those foreign flows stopped coming in – the government will have a massive problem funding its deficit.
MB:What do you think the ratings agencies are thinking of the country right now?
NM: There is a lot of concern on the institutional degradation. A year ago the Public Protector was highly respected and now we have the Reserve Bank taking the Public Protector to court, in order to declare her actions almost illegal.
What worries me also is the National Treasury. Whats happened since the Cabinet reshuffle, is an erosion in quality of some of the key senior people, because people have left.
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