Zuma Errors Prompt Standard Bank to Predict Policy-Fix Push

  • South Africa may avoid credit-rating downgrade to junk
  • Government working with businesses to improve sentiment

President Jacob Zuma’s policy errors at the end of last year may be the catalyst that pushes the South African government to implement reforms needed to avert a credit rating downgrade to junk, according to Standard Bank Group Ltd., the continent’s largest lender by assets.

Zuma shocked markets when he fired Finance Minister Nhlanhla Nene on Dec. 9, replacing him with a little-known lawmaker. The rand tumbled to a record and bond yields surged before the president rescinded his decision four days later and reinstalled Pravin Gordhan, who had held the position between 2009 and 2014. The shuffle added to concerns that policy uncertainty may be weighing on business as companies await clarity on resources legislation and after tighter visa regulations were blamed for hurting tourism.

"The events of December may have been the cathartic experience that South Africa needed,” Goolam Ballim, chief economist at Standard Bank, told reporters in Johannesburg on Tuesday. “It has dawned very heavily on the authorities that the risk of falling into sub-investment grade looms very perilously large.”

Business confidence fell to the lowest level since 2010 at the end of last year, adding to concerns that the nation’s credit rating could be cut to junk this year after Standard & Poor’s put South Africa’s BBB- rating on a negative outlook in December, indicating it may lower it to below investment grade. Gordhan has pledged to stick to spending targets and restore confidence in the economy to help South Africa avoid a credit-rating cut.

“Rather ironically, December may have been the gift that gives us the political room for a credible, fiscally sustainable promise,” said Ballim. Gordhan’s budget speech on Feb. 24 may result in a “level of fiscal rectitude that has not been entirely evident over the last four years,” allowing South Africa to avoid a credit downgrade, he said.

Business Relations

Zuma’s reversal on his replacement of Nene in the face of pressure from some members of the ruling African National Congress is also a positive development, said Ballim. It shows “that there are limits to the extent of erosion in public finance management that will be tolerated and that the National Treasury will find allies for its cause,” he said.

Zuma is seeking to repair relations with businesses. He met with senior executives from companies including Barclays Plc’sSouth African unit and Shoprite Holdings Ltd. in Cape Town on Tuesday before his state-of-the-nation speech on Thursday. Gordhan held talks with business leaders on Jan. 29 on how to avoid a downgrade and boost investor sentiment.

“There’s vociferous dialog taking place between business and government,” said Ballim. “For the first time in years, borne of sheer necessity, there is a level of conversation with regard to the right level of fiscal balance, alongside the private sector’s capacity to commit to investment in a growth cycle premised on reciprocal commitment.”

Resources companies are seeking clarity after a six-year-long review of the country’s mining code. Meanwhile, the country is seeking to ease some restrictions after tourist operators objected to new rules requiring travelers from countries such as China to apply for permits in person and for minor children to carry a detailed birth document when traveling. The industry estimated the stricter laws would cost the economy 7.5 billion rand ($472 million) a year in lost revenue.

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