President Jacob Zuma announced a cabinet reshuffle shortly after midnight on March 31 in which five ministers were removed from cabinet and five ministers moved to new positions. The BRICS Post canvassed several economists and asset managers as to what this would mean and whether this would result in a ratings downgrade.
Speculation had been mounting since Monday morning that President Jacob Zuma would announce a cabinet reshuffle after he called back Finance Minister Pravin Gordhan and Deputy Finance Minister Mcebisi Jonas from an overseas investor roadshow.
Prior to the recall, the rand reached a 20-month best level of R12.31 to the dollar, while in morning trade on March 31 it touched R13.6.
The extent of the revamp of the cabinet was not anticipated by political commentators as ten ministries now have new political heads. As yet, no Directors-General (DG), the bureaucratic heads of ministries, have been replaced, although the DG of Social Development Zane Dangor had resigned earlier in March.
The new Finance Minister is 45-year-old Malusi Knowledge Nkanyezi Gigaba, who was previously the Minister of Home Affairs. He holds a Bachelor of Pedagogics in Education and a Master of Arts degree in Social Policy.
“Rating agencies will likely see this move as a threat to the strength of South Africa’s institutions and hence the heightened probability of an earlier than anticipated rating downgrade,” Mark Appleton, the head of Multi Asset & Strategy at Ashburton Investments, said. Dennis Dykes, the chief economist at Nedbank, was more circumspect, as it depended on whether there was a civil society reaction to the move. The official opposition party, the Democratic Alliance, have already asked the courts for an urgent interdict to prevent the swearing-in of the ministers later on March 31.
“If there is a fight back within the African National Congress (ANC) leading to an earlier elective conference or a presidential recall there is a possibility that the country can avoid a ratings downgrade. Otherwise it is a question of when,” Dykes said.
Rand Merchant Bank foreign exchange strategist John Cairns expected that all the agencies will downgrade the sovereign credit rating by one notch each.
“This means that the foreign currency credit rating from S&P and Fitch will fall to BB+, while it will sit at the edge of investment grade at Moody’s, Baa3. We think all three rating agencies will retain their negative outlooks. Moody’s action will occur as per schedule on April 7. Fitch is not bound by a timeline so it can also act quickly. It is not certain, but S&P might bring forward its review to the coming weeks, ahead of the scheduled 2 June deadline,” Cairns noted.
Nomura International head of Emerging Europe, Middle East and Africa Economics Peter Attard Montalto said the cabinet reshuffle may prompt multiple downgrades.
“The cabinet reshuffle is an attack on the institution of the National Treasury (NT) and as such will trigger multiple downgrades. As we’ve highlighted before whilst there are some fiscal risks we are more worried about NT’s role in procurement, preventing corruption and oversight of state-owned enterprises including nuclear and banking,” he said. Charl Kocks, the CEO of Ratings Afrika, which looks at governance of institutions, was also more circumspect.
“I expect there will be a ratings downgrade, but there will be no knee-jerk reactions. The position of National Treasury (NT) has been weakened and the agencies will be very hard on them from now on: reassurances will have to be backed up by more than simply NT views,” he said.
Amongst the generally negative reaction to the cabinet reshuffle, the SAPVIA (the South African Photovoltaic Industry Association) stood out as welcoming the move.
“We would like to congratulate Ms Mmamoloko Kubayi on her ministerial appointment to the Energy portfolio. We look forward to engaging with the new Minister and her team around how to give effect to the transformation of the energy sector and the role that solar PV can play in this journey,” the organisation said.
Colen Garrow, the economist at Meganomics said that political uncertainty has crept higher, and this will likely weigh against what is left of the country’s investment grade rating.
“Rating agencies will likely make pronouncements by June. However, they could announce sooner and are not bound by a fixed calendar date, but rather events that change economic and political risk fundamentally, and thus make a change in a credit rating more urgent,” he said.
Lesiba Mothata, the Chief Economist at Investment Solutions, said investor confidence has been severely dented and foreign investors have already priced in a ratings downgrade.
“Given such volatility and uncertainty, the new authorities need to communicate that South African institutions remain intact. The independence of the South African Reserve Bank and the judiciary needs to be affirmed. They will also need to demonstrate that fiscal policy will not take a materially different direction from what has been established since 1994. The biggest fear held by investors is whether more populist fiscal policies will be embraced or not,” he said. Helmo Preuss in Pretoria, South Africa for The BRICS Post