Zuma's U-turn doesn't dispel policy uncertainty - Fitch Ratings

Agency says February's budget will be key in assessing govt's commitment to prudent financial management

Fitch: South Africa MoF U-Turn Doesn't Remove Policy Uncertainty

14 DEC 2015 10:01 AM EST

Fitch Ratings-London-14 December 2015: The replacement of a second finance minister in South Africa within five days has not enhanced confidence in government effectiveness and leaves questions over the direction of economic policy, Fitch Ratings says. In this context, February's budget will be an important event in assessing the government's commitment to prudent management of the public finances. 

President Jacob Zuma yesterday said that Pravin Gordhan would replace David van Rooyen as finance minister. Unlike van Rooyen, Gordhan is a known quantity. He served as finance minister from 2009 to 2014 and built up a reputation for disciplined management of the public finances. 

Gordhan said today that the government's expenditure ceiling is "sacrosanct" and that "we will unreservedly continue our fiscal consolidation process and we will stabilise our debt in the medium term". Fitch views the nominal non-interest ceiling, which the government has met since 2012, as an important pillar of fiscal discipline. 

Gordhan pledged to maintain growth-enhancing projects and programmes supporting the poor, while redoubling efforts to ensure the efficiency of public spending, reduce corruption and enhance transparency. He also emphasised that any support for state-owned enterprises will be done in a fiscally sustainable manner. 

Nevertheless, the reappointment of Gordhan does not remove all the uncertainty over government effectiveness and the coherence and credibility of economic policy generated during a turbulent week. Zuma had only announced the appointment of the little-known van Rooyen in place of Nhlanhla Nene on 9 December, while failing to provide clarity over the rationale for the change. The move sparked a sharp drop in the rand and rise in government bond yields. 

Some of van Rooyen's few public comments had talked of the need to increase the "accessibility" of the National Treasury and making it the "axis of our development agenda". 

The market reaction to van Rooyen and Zuma's subsequent U-turn may strengthen the hand of Gordhan and those in the cabinet arguing for prudent fiscal policy, at least in the near-term. However, the earlier appointment of van Rooyen in place of Nene still raises questions over Zuma's motivation for the change and what it reveals about his economic policy preferences. 

As we said last week, change in leadership at the Treasury would be relevant to our sovereign rating assessment if it led to a loosening of fiscal policy or weakening in the transparency and financial management of state-owned companies, which represent a contingent liability to the sovereign. Clarity over government policy regarding the proposed nuclear power building programme and procurement plans by South Africa Airways will also be instructive in the wake of this week's events. 

We identified looser fiscal policy that resulted in a failure to stabilise the ratio of government debt/GDP as a rating sensitivity when we downgraded South African to 'BBB-'/Stable on 4 December. The main driver of our downgrade was further weakening in GDP growth performance and potential. This in turn has made it difficult to reduce the budget deficit and pushed up gross general government debt to GDP, which will increase to 51% at end 2015/2016, nearly double the level seen in 2008/2009.

Statement issued by Fitch Ratings, 14 December 2015