South Africa should get ready to lose at least R100 billion in foreign investment, and see the rand head to R15 to the dollar on the back of what has been described as a worrying mid-term budget policy statement from finance minister Malusi Gigaba.
According to analysts at Anchor Capital, South Africa is heading down a very dark path, as the MTBPS showed that the government is further prioritising spending towards the state’s wage bill, social grants and interest payments, leaving little in the way of funding for productive infrastructure necessary to lift South Africa out of its slow growth trap.
“Margaret Thatcher famously quipped that the problem with socialism is that you eventually run out of somebody else’s money to spend. The MTBPS was both an acknowledgement that our government has lost control of finances and that we are rapidly running out of other people’s money,” Anchor said.
“The problem in South Africa is arguably not so much about socialism, but more about an excessive government payroll that is mired in inefficiency and corruption,” it said.
These factors have all combined to crowd out the private sector and dominate the economy. The inevitable slow economic growth was exacerbated by a collapse in confidence by consumers and business on the back of the cabinet reshuffle to remove Pravin Gordhan, it said.
“Rating agencies should be expected to take a dim view of the loss of control of our finances, the high debt load and the poor quality of the response by treasury. We should expect that downgrades are inevitable and should pull our expectations forward.”
“It is highly unlikely that we will retain our current ratings for the next 12 months and we need to adjust our base case to be that South Africa will be kicked out of the WGBI government bond index,” the group said.
The expectation should be that rates will gravitate towards 10.25% and the rand towards R15.00 to the dollar at some point over the next year.
According to Anchor, its baseline assumption is that after South Africa is kicked out of the World Government Bond Index, there will be a forced sell-off of at least R100 billion – with the outlook very negative, considering that the South African government appears content to ignore the growing crisis.
“For now, the government remains oblivious to the situation,” Anchor said.
“We note with concern the press release from the ANC congratulating the Finance Minister on the budget and prioritizing social spend and transformation over fiscal prudence. With no growth, there will be no transformation. Without the current credit ratings, the risk of a failed government bond auction is quite high. The market will soon say ‘no more’.”