Cyril Ramaphosa has only been president of South Africa for less than a month, but his early actions are already comforting investors that the country’s long and slow demise might finally be reversing. His rapid replacement of the board of troubled electricity utility Eskom was a strong signal to entice the private sector to step in to rescue the troubled state-owned enterprise. A preferable step to dipping into state coffers already under enormous pressure as evidenced by the ZAR 60bn shortfall highlighted in the medium term budget review in October.
This has in turn created the political space for the National Treasury to demonstrate that the country remains committed to fiscal consolidation. Its efforts to raise revenues, notably with the first increase in the VAT rate since the end of apartheid, and cut spending to accommodate for former President Jacob Zuma’s promise of a free higher education for all, have indeed been rewarded by the market, with local yields now 100 basis points lower since Ramaphosa’s victory at the ANC’s December elective conference.
The somewhat contractionary effect of the 21 February budget on growth should largely be offset by the positive momentum that Ramaphosa will likely continue to breathe into the private sector. Key to that is the recent cabinet reshuffle which, while introducing Zuma-affiliated names that will help preserve the ANC unity ahead of the 2019 elections, also restores the credibility of key ministries.
The re-appointment to the National Treasury of Nhlanhla Nene after his ominous removal by Zuma in December 2015, and Jeff Radebe as minister of energy are two examples that stand out. The latter should help close the debate over the unaffordable nuclear programme. The appointment of former finance minister Pravin Gordhan to head the department of public enterprises, which are in urgent need of restructuring, and Gwede Mantashe as the new minister for mineral resources, will also help restore confidence in the sector, lost in the last few years after numerous changes of leadership.
President Ramaphosa’s ability to deliver all those changes before the Moody’s review on 23 March means that South Africa should, at least for now, avoid a further credit downgrade. To be clear, the path to credit upgrades is likely to be long and slow given the state of the South African economy. Even the hype around the new president is already creating its own challenges with the 20% rand appreciation since November weighing on the trade deficit. But the near-term outlook is for once positive, and the recent sell-off in local bonds should be seen as an opportunity to add to long positions.