File image: President Jacob Zuma. IOL.
JOHANNESBURG - Today investors are eyeing the latest South African political developments as President Jacob Zuma and ANC leader Cyril Ramaphosa lock horns in a leadership battle, which has heavily impacted the rand and as analysts hold out more optimism that South Africa can potentially avert a ratings downgrade by Moody’s Investors Service.

Ramaphosa said yesterday that the ANC executive body would meet today to discuss the fate of Zuma, who is resisting pressure to step down.

“South Africa has held its own, and that’s because of the expectation that Zuma will be ousted,” said Peregrine analyst Bianca Botes on Friday. “When it does happen, we’ll probably see a big knee-jerk reaction, but it won’t necessarily be sustained below R11.80.”

Ratings agencies have the country on a ratings watch for further downgrades if the country does not get its house in order and exercise fiscal discipline.

The Bank of America Merrill Lynch in its research note on South Africa on Friday said that credible growth-enhancing reforms should accompany fiscal measures to avert its base case of a Moody’s downgrade.

However, Citigroup Global Markets last week said that there was an increasing possibility that Moody’s won’t downgrade South Africa. Maarten Ackerman, the chief economist at Citadel, said the biggest threat that still remains to the economy is the coming credit rating decision by Moody’s. “Moody’s held back from making a decision in November, and there have since been many positive developments, which now make a downgrade less likely.

“For example, political uncertainty over ANC leadership has been resolved with the election of Ramaphosa, who also seems to be playing hardball in seeing that the right policies are delivered and dealing with corruption,” Ackerman said.

Avert downgrade

Pressure is mounting on the National Treasury to hike the Value Added Tax (VAT) by 2percent as it seeks to stabilise government debt and avert a credit downgrade by Moody’s Investor Services.

Ferhan Salman, an analyst with the IMF, said that a VAT hike of 2percent would rake in R20billion to the country’s fiscus, but that such a move could constrain growth in the medium-term.

“To avoid a negative impact on growth, VAT directed at the consumption of non-essential goods could be possible, but the rate would have to be higher to deliver the required revenues.

“Moody’s rating decision will depend on the size of the fiscal effort, the assessment of the impact of improving governance and the risk premium.

“A Moody’s downgrade would trigger a sell-off and a reversion in the rand/dollar to R12.70” Salman said.

Last October’s Medium Term Budget Policy Statement painted a bleak picture of South Africa’s economic outlook: the consolidated debt to GDP ratio had widened to 4.3percent from a target of 3.1percent. The projected tax shortfall for 2017 was estimated at R50.8bn.