20181009-法国巴黎银行-SOUTH_AFRICA_–_NAVIGATING_THE_NOISE_8页_987kb

South Africa – Navigating the Noise Summary

Core Content

This report provides an analysis of South Africa's economic and political landscape, focusing on key developments in the financial sector, fiscal policy, and structural reforms. It also includes a trade recommendation for the USDZAR currency pair and highlights the implications of Moody's potential sovereign credit rating review.

Main Points

• Political Changes: President Cyril Ramaphosa has replaced Nhlanhla Nene as Finance Minister with Tito Mboweni, a former South African Reserve Bank Governor. This change is expected to reassure markets that the Treasury's status quo will remain intact.

• Fiscal Stability: Despite political uncertainties, the government is expected to maintain fiscal prudence, with Mboweni's appointment signaling a continued focus on financial stability and policy credibility.

• Economic Reforms: Structural reforms are progressing slowly, but the finalization of the mining charter is a notable milestone. The new charter improves on the June version, removing the 'trickle dividend' and adjusting the black ownership target for new mining rights.

• Job Creation and Social Dialogue: A recent jobs summit aimed to foster collaboration between business, labor, and government to reduce unemployment, with commitments to create 275,000 jobs annually over five years and financial support for black entrepreneurs.

• Moody's Rating Review: Moody's is scheduled to review South Africa's sovereign credit rating on 12 October. While no changes are expected immediately, the timing of the review could be delayed if the upcoming medium-term budget (MTBPS) on 24 October provides clarity on fiscal consolidation.

• Currency Outlook: The ZAR is expected to appreciate in the short term due to the BEER model suggesting USDZAR is overvalued by about 4.3%. A short USDZAR trade via a 3-month forward contract has been initiated at 15.0253, with a target of a 5% ZAR appreciation and a carry of +38bp/month.

• Trade Idea: The report recommends a short USDZAR position, based on the BEER model and conditional projections. The fair value is estimated to be between 14.00 and 14.20, with a stop loss at 15.60.

Key Information

• Mining Charter: The new version of the mining charter is expected to be signed into law by the end of November. It is seen as a positive development for investment and job creation, potentially unlocking ZAR100bn in new investment and creating up to 50,000 jobs.

• Fiscal Challenges: The government faces challenges in maintaining fiscal consolidation, particularly with rising socio-economic spending pressures and potential further fiscal slippage for FY 2018-19.

• Land Reforms Uncertainty: The issue of land reform and the ANC's "expropriation without compensation" policy remains unresolved, with the constitutional review delayed and no clear timeline for policy clarity.

• ZAR Volatility: ZAR volatility is a concern, as it impacts the currency's carry. However, the short-term outlook remains positive due to the BEER model and recent trade recommendations.

Structural Reforms and Policy Progress

• Policy Measures: The government is focusing on reforms such as:

  • Relaxing visa requirements to boost tourism.
  • Finalizing telecommunications spectrum allocation.
  • Supporting commercial farming.
  • Finalizing the mining charter.

• Fiscal Reprioritization: There is a proposal to reallocate approximately ZAR50bn from underperforming projects to infrastructure-focused initiatives. This is expected to be detailed in the upcoming MTBPS.

• Economic Stimulus: The new economic stimulus plan is aligned with the national development plan and aims to boost growth and employment through targeted policy changes.

Moody's Rating Outlook

• Current Rating: Moody's has affirmed South Africa's Baa3 rating, with a stable outlook.
• Review Timing: The review is likely to be delayed until after the MTBPS on 24 October.
• Rating Stability: If the National Treasury manages to limit fiscal slippage to 0.3-0.4pp and maintains fiscal consolidation, Moody's is expected to delay any rating changes until after the February 2019 budget.

Conclusion

South Africa is navigating a complex political and economic environment, with efforts to stabilize the economy and improve public trust through policy reforms and fiscal discipline. While structural changes remain slow, the mining charter's finalization and the potential for ZAR appreciation are positive signals. The upcoming MTBPS and Moody's rating review will be critical in shaping investor sentiment and the country's economic trajectory.