ANALYST: Zuma's damage to SA economy seems too high to mend

File Image: IOL

File Image: IOL

Published Feb 16, 2018


JOHANNESBURG - South Africa is ticking the boxes to stave off further credit rating downgrades. Last year’s downgrade has made realists in the ANC realise that they have to do the “right thing” to restore business and consumer confidence, remove uncertainties, and strengthen state-owned enterprises and fiscal discipline.

That “right thing” saw Cyril Ramaphosa rise to the presidency of the ANC in what was seen as a victory for all South Africans. Ramaphosa’s stance on corruption has won him respect from virtually all business leaders.

Even the local market nodded at the developments with the rand firming, and the SA Chamber of Commerce and Industry (Sacci) said business confidence had returned to levels last seen two months before President Jacob Zuma fired Nhlanhla Nene as minister of finance in December 2015. Business confidence is a leading indicator for credit ratings and its restoration shows that for the year it is likely to be favourable.

Economic growth is currently in the region of 2 percent quarter-on-quarter annualised - despite the negative impact of Steinhoff on the market as a whole.

The improved business confidence will support further growth, especially in rebuilding inventories and capital expenditure, and the SA Reserve Bank is likely to be dovish and cut the repo rate to boost economic sentiment. Forward-looking indicators suggests that strong global growth will be maintained for some time.

Unfortunately, to keep the Budget deficit in check and to restore fiscal discipline, the 2018/2019 Budget is going to be a tough one and may be a drag on economic growth over the next two years. Although it might be tough on the masses, it is likely to appease the rating agencies.

Another positive is Parliament’s about-turn in the handling of state-owned enterprises, where it has taken a hard-line stand on the financing, management and rooting out of corruption.

But how much did President Jacob Zuma’s irrational decisions and resultant downgrades cost South Africa? The latest JP Morgan Global and Services Purchasing Managers Index (PMI) indicated that global economic growth is at a 40-month high. However, South Africa has missed out completely on this upswing.

It is extremely difficult to put a number to the economic damage Zuma’s irrational decisions did to the country. What is certain is that his cabinet reshuffles impacted the economy directly.

From replacing Ngoako Ramatlhodi with Mosebenzi Zwane at the height of the Mining Charter negotiations, to parachuting Des van Rooyen to the finance ministry at the expense of Nhlanhla Nene, and Malusi Gigaba at Pravin Gordhan’s expense, the markets and ratings agencies have indicated the cost.

The downgrades have been followed by a de-rating of South African shares in the FTSE/JSE all share index against global stocks. A de-rating of a share or an index means a reduction in the value investors are willing as participants factor in increased risk premium on the particular stock or market.

Before Ramatlhodi and Nene were fired, the JSE ranked on par with developed equity markets as measured by the MSCI World $ Index. But after the reshuffles, S&P and Fitch downgraded our sovereign credit rating and this was followed by a gradual de-rating of the South African equity market relative to the world markets as the valuation gap opened up.

Gordhan’s unceremonious sacking in March resulted in further downgrades which accelerated with Gigaba’s medium-term budget policy statement in October, where the lack of oversight and fiscal discipline was laid bare.

The valuation gap between the local equities and developed markets is currently around 5, which means that our cyclically adjusted price-to-earnings ratio is 4.8 points lower than that of the MSCI World $ Index.

According to my calculations, the MSCI World $ Index rating (cyclically adjusted price-to-earnings ratio) is approximately 23.5 compared to approximately 18.7 for the FTSE/JSE all share index.

As the average real earnings of the FTSE/JSE all share index is 3047, it means that if the rating of the JSE remained on par with the developed markets as measured by the MSCI World $ Index, the JSE all share index would have been on 71600 instead of 57 100 currently - yes, more than 25percent higher.

According to Iress, the current market capitalisation of the FTSE/JSE all share index is R7 237 billion. If the rating of the JSE remained on par with the developed markets the market value would have been R9 075bn. Yes, a staggering R1 837bn higher than currently.

The market capitalisation of the JSE is an indicator of the size of the underlying South African economy.

Given the fact that the ratio between the FTSE/JSE all share index market capitalisation and GDP (total value added at basic prices) ranged between 1.6 and 1.9 and averaged 1.75 since 2009 (it is currently 1.73), it means that our GDP in nominal terms, or the size of the economy, in the third quarter of last year could have been between R4776bn and R5 185bn instead of the official R4 181bn - a massive R595bn to R1004bn higher.

Surely, there are other factors such as global sentiment towards emerging markets, commodity cycles and global investors’ preferences. But the damage to our economy is far too high to catch up.

Ryk de Klerk was co-founder of PlexCrown Fund Ratings and is currently a consultant for PlexCrown Fund Ratings.


Related Topics: