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Is junk status befitting a South Africa?

By Rafiq Raji, PhD

I have being doing a lot of reading about the 2007-08 global financial crisis (GFC) lately. And a recurring theme is how significantly culpable ratings agencies were for the crisis. Geoff Colvin of Fortune magazine wrote of ratings agencies on 22 December 2008: “clueless, conflicted and unregulated.” Okay, so maybe they got carried away with those American mortgages – until the bubble burst, almost everyone attended the party. And Mr Colvin’s stinging rebuke can be excused considering the recession in tandem with the GFC was still biting hard at the time. However, the fundamental question that I can’t get out of my head is: even after that abysmal failure, did ratings agencies really learn anything? Some recent credit rating decisions have been a little bit curious. Moody’s decision to affirm its two-notch above junk credit rating (Baa2) for South Africa in early May especially. In this regard, a South African columnist, Bronwyn Nortje, aptly titled her 12 May 2016 piece: “Be brave and tell us we are junk.” Of Moody’s she says further: “they are not brave enough to call a spade a spade and be the first ones to break the bad news that we’re junk.” I agree. As an African and one who loves South Africa – it is a beautiful country and the people are quite kind, I do worry about the additional hardships ordinary South Africans would grapple with if their country’s credit rating is downgraded to junk status by any of the major rating agencies. But as an analyst, being sentimental is a luxury I cannot afford. At this moment, South Africa’s credit is not investment grade. The authorities know it. Analysts know it. And so do the ratings agencies – Standard & Poor’s (S&P) and Fitch publish their reviews on 3 June and 8 June respectively.

Apart from the fact that growth is expected at about half of a percent this year and could be lower – the South African Reserve Bank only recently cut its forecast to 0.6 percent, the vulnerabilities of South Africa’s institutions have been exposed by President Jacob Zuma’s less than ideal approach to governance. Mr Zuma has demonstrated a mastery of these vulnerabilities. And it is increasingly likely he may serve his full second and final term as president – despite his beleaguered and scandal-ridden stewardship thus far. Much of the hesitation on the part of ratings agencies it seems to me is because of the goodwill of finance minister Pravin Gordhan. Such is the goodwill he enjoys that only last week, an influential South African business newspaper made an appeal to S&P to give the country a six-month breather. Considering how much stress Mr Gordhan has been under from the government he supposedly serves – from police investigations to a rumoured but officially debunked plan to arrest him for espionage, market participants dearly want him to succeed. Mr Gordhan’s troubles may not go away regardless. If South Africa’s sovereign credit rating is downgraded to a junk grade either by Fitch or S&P, Mr Gordhan would not have served Mr Zuma’s purpose. Conversely, if South Africa gets a reprieve, Mr Gordhan becomes a little bit more powerful than Mr Zuma would like. In the latter case, the embattled finance minister gets to leave – with Mr Zuma’s unsurprising resilience, it is increasingly likely he would – when the ovation is loudest at least.

In any case, on South Africa, ratings agencies have almost always followed the lead of market participants. In December 2015 – when Fitch downgraded the country’s rating by one notch to its lowest investment category (BBB-) and S&P changed the outlook on its own BBB- rating to negative, markets had priced in that view long before. The downgrades were simply a formality. Now, a similar trend is palpable. Credit default swap (CDS) spreads for South African credit are edging closer to that of Brazil’s – which all three major ratings agencies have in junk territory: First by S&P (the most hawkish) in September 2015, then Fitch in December 2015 and finally Moody’s in February 2016. Typically, ratings agencies tend to be quiet in the few weeks before a major decision. Thus, Fitch’s hawkish tone just a week before the announcement of its decision suggests to me it plans to affirm its current rating – not that it should. S&P has been somewhat consistent in its views on what it thinks of the South African economy. It would surprise me a great deal if S&P’s hard talk turns out to be huff and puff. Never mind that South African business leaders – keen to keep the newfound power a boxed-in Mr Zuma has had to cede to them – are desirous of demonstrating the extent of their influence. In any case, they could always point to Moody’s reprieve in the event of an adverse outcome from S&P and Fitch. More fundamentally, is junk status befitting a South Africa at this time? Yes. Growth is tepid and structural weaknesses abound. Political uncertainties make solving these problems harder. The part of me that loves South Africa and its people would gladly be wrong about my expectation of a likely downgrade to junk status by S&P this week. Tough love suggests to me, however, that maybe South Africa’s leaders need to be shocked into preventing further deterioration in their country’s fortunes. A rating downgrade to junk status may very well be the push that they need.

Also published in my BusinessDay newspaper back-page column. See link viz.

Recession likely, devalue naira now

By Rafiq Raji, PhD

It is no longer news that the Nigerian economy contracted by almost half of a percent in the first quarter of 2016 – my forecast for subscribers to my firm’s research service ( and Reuters was -0.7 percent. Some clueless individuals have tried putting the blame on Dr Yemi Kale, the head of Nigeria’s statistics bureau. Complete nonsense. Considering the delayed passage of the 2016 budget into law, foreign exchange restrictions and the policy uncertainties in tandem, the negative growth headline did not come as a surprise. In my column of 23 February 2016 – “Budgets have never been so crucial for South Africa and Nigeria” – I highlighted this possibility. Then I wrote: “Year-on-year economic growth in the first quarter of 2016 would likely be lacklustre – could be negative even – due to constrained economic activity in the quarter thus far.” I offered reasons why this could be the case in my column of 12 April 2016 (“Buhari needs to be pragmatic”): “These economic difficulties are due to bad policy choices by Nigeria’s current leader, Muhammadu Buhari. The scarcity of foreign exchange and fuel can be traced to his administration’s penchant for price control. The naira is depreciating in the parallel market because of speculation fueled by inappropriate pricing of the currency by the country’s central bank. Fuel is scarce because marketers stopped importing the commodity to avoid losses. With fuel subsidies stopped and foreign exchange needed to replenish supplies scarce, marketers have little incentive to fill the supply gap; especially as the regulated price provides meagre margins. Until a market-driven approach is adopted on all these fronts, the problems are likely to remain.” The quasi-deregulation of fuel pricing in May – owing admittedly by Vice-President Yemi Osinbajo to the scarcity of foreign exchange – is a vindication of these views.

A recession – two consecutive quarters of negative growth – is highly likely this year. A similarly higher base in Q2-2015 and tepid activity in Q2-2016 thus far is why. I actually now see the risks to my revised 2 percent growth forecast for 2016 – 4 percent earlier in the year when I was cautiously optimistic about the ability of the Buhari administration – significantly to the downside; the economy grew by 2.7 percent in 2015, even then a significant drop from 6.3 percent only a year earlier. Other challenges have arisen. Just as some progress was being made in tackling the terrorist group Boko Haram, Fulani herdsmen from the northern parts of the country (authorities initially alleged they were foreigners) began engaging in wanton killings of rural farmers in the south, residents of which are now contemplating arming themselves. With emoluments for former Niger Delta militants cut, there are renewed agitations in that part of the country as well; evident in increased oil and gas pipeline vandalization. Gas supply disruptions have cut power generation by about half sometimes – even at full capacity, power supply is inadequate in any case. President Buhari was slow to react, albeit he has since directed the armed forces to do the needful. Still, the deterioration in security is instructive. A strategic appraisal suggests the disruptions are likely sponsored, in view of presidential elections in 2019: President Buhari rose to power on the promise of improving the security situation.

Amid the foregoing, the monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) meets on 23-24 May. Annual consumer inflation accelerated to 13.7 percent in April, effectively making the monetary policy rate of 12 percent – raised to this level by 100 basis points in March – negative in real terms. The most recent inflation data available at the committee’s meeting in March was for February: 11.4 percent. The pace of consumer inflation has since quickened: 12.8 percent in March. With likely continuing naira weakness – especially on currency devaluation expectations – and the authorities’ expansionary fiscal stance, inflation is likely to accelerate further. Thus, inflation expectations have risen significantly. As recession also looms, the committee faces a policy dilemma – not entirely, considering its hitherto accomodative stance (since July 2015) before tightening policy in March failed to stimulate the economy. Still, the MPC needs to tighten policy further. My view is that committee members may opt for a 100 basis point rate hike to 13 percent at this meeting – a 200 basis point increase is probably more appropriate. There are also indications the CBN would soon announce a new foreign exchange policy framework – likely in the committee’s press statement on 24 May. A two-tier system and a wider exchange rate band have been mooted. Restrictions on disruptive short-term portfolio inflows are also being considered it seems – one committee member suggests this at the meeting in March. More importantly, a robust foreign exchange policy framework would ease current uncertainties and provide some predictability. In tandem, there is a need for the CBN to devalue the naira further – by at least 25 percent to 250 naira in exchange for the U.S. dollar (currently about 200 naira) in the first instance. Vice-President Osinbajo – who is formally in charge of economic policy – has signalled this is likely soon. However, President Buhari – who has not hidden the fact that he really calls the shots – is yet to show concurrence publicly. There is speculation he may have acquiesced however, in light of the worring state of the country’s finances. In any case, there has never been a better time for the CBN to do the right thing. That is; devalue the naira as needed and tighten monetary policy as necessary to curb the initial but likely temporary jolt of inflation.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz.

SARB’s gradual tightening stance calls for rate hike in May

By Rafiq Raji, PhD

Just a week before the monetary policy committee (MPC) meeting of the South African Reserve Bank (SARB) on 17-19 May, deputy governor Daniel Mminele had some interesting choices of words to describe the South African economy: ‘flat on its back,’ he calls it. It was one of those rare occasions when a central banker unwittingly says what had long overwhelmed his thoughts. That is the truth in fact – most growth forecasts for 2016 are now closer to 0.5 percent than they were to almost 1 percent earlier in the year. Incidentally, Mr Mminele’s comments are at odds with those by his boss, SARB governor Lesetja Kganyago, who days before had tried to project a sense of optimism about the economy: ‘turning a corner,’ he says – more the patriot than central banker talking in my view. Governor Kganyago – as were other key government officials – was trying to reinforce Moody’s decision to affirm its two-notch above junk status sovereign credit rating for South Africa, albeit with a negative outlook. I find Moody’s decision very curious indeed – and that is putting it mildly. Standard and Poor’s – a consistently credible rating agency, in my view – was more candid: ‘dismal growth,’ its senior analyst calls the South African outlook. Such uninspiring comments just a few weeks to its ratings assessment is ominous; suggests an imminent downgrade in June in my view. South African authorities have not been totally helpful either. This past weekend, a South African newspaper revealed that there were plans to arrest finance minister Pravin Gordhan for espionage and that a cabinet reshuffle was imminent. The official reaction was swift. Denying the rumour, the authorities reiterated that no such moves were being contemplated – no matter that they made sure to point out that it remains within the powers of President Jacob Zuma to appoint his cabinet. Still, revelations by newspapers in the past have been vindicated more often than not. Authorities’ denial reinforces the rumour unfortunately. The inevitable outcome is that market participants would be spooked in any case.

I have revised my 2016 growth forecast for South Africa to 0.7 percent from 0.9 percent previously. Recent data have not been encouraging – the only credible bright spot is probably the declaration by the state-run power utility provider that there would be no load-shedding for the remainder of the year. In April, the International Monetary Fund (IMF) cut its 2016 growth forecast for South Africa to 0.6 percent from 0.7 percent in January, identifying likely continued lower Chinese demand and probable sovereign credit rating downgrades as key downsides to its outlook. Even as growth of about half a percent in 2016 is certainly dismal, it does not help very much that the risks to the outlook are more to the downside. Unemployment rose to 26.7 percent in the first quarter of 2016 from 24.5 percent in the prior quarter, the highest on record: Statistician-General Pali Lehohla believes ‘the economic climate is not helping.’ Mining (7 percent of GDP) contracted 18 percent year-on-year in March, the highest year-on-year contraction on record. Manufacturing (13 percent of GDP) also contracted in March, by 2 percent year-on-year. Furthermore, agricultural output (2 percent of GDP) has been hard hit by drought effects with expectations of a poor maize harvest in 2016 – previously a net maize exporter, South Africa would need to import 3.8 million tonnes of maize (about 30 percent of its average annual production hitherto). Similarly, the final estimate of the 2015 winter wheat crop harvest (released on 12 May) was 18 percent lower year-on-year at 1.44 million tonnes due to drought. Business confidence also remains low (index was 82.5 in April, down 7.4 points year-on-year; albeit an improvement from a record low of 79.6 in December 2015). Compounding all of these is the political uncertainty around President Jacob Zuma’s legal troubles and divisions within the ruling African National Congress (ANC) party. With the ultra-leftist Economic Freedom Fighters (EFF) opposition party all but set to make significant gains in municipal elections in August, the ANC has begun to resort to populism: on the campaign trail last week, President Jacob Zuma promised the return of land to blacks – an all too familiar populist tactic and a key EFF campaign promise.

As these happenings swirl in the thoughts of SARB MPC members this week, they would also be focusing on their primary task: keeping inflation in check. Their forecasts were relatively subdued at their last meeting. What did not change was that inflation would likely remain in breach of the SARB’s 6 percent upper bound target into 2017. To avoid a sharp rate hike later in the year – only three meetings (in July, September and November) left for 2016 after that in May – another 25 basis point bump may be necessary at this meeting. If the SARB’s inflation forecasts in March are anything to go by, a 7.3 percent end-2016 headline suggests a need to raise rates by at least 50 basis points to 7.5 percent before the end of the year from 7 percent currently. As risks to their inflation forecasts are more to the upside – my forecasts see headline inflation accelerating to 7.6 percent in December, a prudent approach would be to raise rates by at least 75 basis points to 7.75 percent (in quarter percent increments) before the end of the year to anchor these expectations and to ensure real interest rates remain positive. For April (data out on 18 May), I see headline inflation at 6.3 percent. Additionally, SARB research (published in its monetary policy review report in April) estimates an increase in short-term interest rates by about 80 basis points in the aftermath of a potential sovereign credit rating downgrade to junk status – the Bank expects long-term yields to rise by 104 basis points on this event. These are the considerations – upside risks to inflation and interest rates and a sustained breach of the upper bound of the SARB’s inflation target – that underpin my view that a 25 basis point rate hike may be necessary at the meeting this month. Analysts are divided on the likely outcome, however. In the Reuters poll ahead of the meeting, twenty-two economists thought the SARB would likely prefer to keep its benchmark interest rate unchanged at 7 percent – this economist and nine others took the minority view of a likely 25 basis point rate hike to 7.25 percent.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz.

Zambia to maintain tight monetary policy

By Rafiq Raji, PhD

The monetary policy committee of the Bank of Zambia meets on 12-13 May 2016. I think the committee would keep the benchmark interest rate unchanged at 15.5 percent; raised to this level by 300 basis points in November 2015. Although headline inflation remains in the double-digits – and would probably remain so for most of the year (except probably in December), the monthly pace has slowed; 0.3 percent month-on-month in April from a monthly pace of above 1.0 percent at the beginning of the year. Headline inflation was 21.8 percent year-on-year in April from 22.2 percent in the prior month. Food supply is expected to ease and the kwacha has been recently stable. There is worry that upcoming elections in August and drought effects could accelerate prices. Additionally, power shortages remain. Zambia continues to import the supply shortfall – at least 300 mega watts (MW) – from South Africa and Mozambique. It is also feared that power tariff hikes reversed by President Edgar Lungu earlier in the year – clearly motivated by a desire to win the support of the electorate ahead of the August 2016 polls – may be reinstated after the elections. To ensure Zambia returns to a fiscally sustainable path, this is likely one of the measures to be insisted upon by the International Monetary Fund (IMF) when authorities start a programme with the Fund in the fourth quarter of 2016.

Last week, Zambian authorities also announced downward revisions to its growth forecasts. Authorities now see about 3.0 percent growth in 2016 – little different from the 2015 headline of 3.2 percent announced on 5 May 2016 – with the fiscal deficit for the year likely coming out just a little below the 2015 level of about 8 percent. In February, authorities had expected 3.7 percent growth in 2016 and above 4 percent for subsequent years. My 2016 growth forecast is 3.1 percent. Zambian authorities see economic challenges that emerged since 2015 enduring for the remainder of 2016, even as they work towards surmounting them. These challenges include a continued power shortage and likely lower for longer copper prices. In early May, ongoing load-shedding – 8 hours of power per day – worsened as a power connector in neighbouring Zimbabwe through which Zambia imports power from South Africa and Mozambique had technical faults. The power supply problems come as two major hydroelectric power stations are running below capacity. The Kafue Gorge power station with an installed capacity of 990MW is currently producing 600MW. The Kariba dam station with an installed capacity of 1,080MW is currently producing below 300MW, as water levels remain low. So the 300MW authorities import – that is even when there are no power connector problems – is inadequate. Authorities are building new power stations. They are due for completion years out, however. So growth would probably continue to come out below potential in 2016-17. Thus, I am a little skeptical about the authorities’ expectation of about 6 percent growth in 2017, when they believe improved power supply and cost-reduction measures by mining companies should begin to take effect. I agree that some improvements would be recorded. But a double acceleration in growth in just a year? That seems a little bit optimistic. Additionally, there is likely limited price pressure from the kwacha (relative to the currency’s volatile trend hitherto), which has been stable of late. In March, the African Development Bank (AfDB) approved a US$125 million loan for Zambia – I wonder about this though, considering elections are just months away. The August elections were a major reason why the IMF programme was proposed for the fourth quarter of 2016, after the elections. It would be somewhat curious if the AfDB chooses to disburse its loan before then. Incidentally, investor confidence has recovered somewhat. In March, Glencore – a global mining giant – announced a US$1.1 billion investment in new copper mines. The vote of confidence comes as authorities revised their royalty tax system to a price-based one, welcome relief for mining investors who hitherto had to contend with frequent and abrupt changes to the royalty tax regime by authorities. With copper output for 2016 put at 700 thousand tonnes in 2016 and 2017, a significant recovery in economic output is likely only evident in 2018 when copper production of 1 million tonnes is expected.

Fears about food shortages may be misplaced, in 2016 at least – albeit the risk of a prolonged drought remains. In early May, President Lungu announced a bumper maize harvest – 2.7 million tonnes – for the 2015/16 farming season. As the monthly maize consumption is put at 100 thousand metric tonnes, the harvest is more than sufficient to cater for the local population for the remainder of 2016. Authorities point to dubious millers for the artificial price increases for mealie meals – the local maize-produced staple food. In April, it announced that the Food Reserve Agency had since November 2015 distributed about 700 thousand metric tonnes of maize from the country’s grain reserves to millers at subsidized prices. It alleges that some millers instead chose to export the subsidized supplies, causing an artificial shortage and price hikes. This motivated an earlier maize export ban, which was lifted in April. These considerations suggest to me inflation may not likely accelerate as much as authorities expect – about 15 percent by year-end. Even as my model allows for some acceleration in the months around the elections – that is, July, August, and September – it doesn’t come out with that significant a number. My end-2016 inflation forecast is actually about 9-10 percent year-on-year. This underpins my view that the Bank of Zambia may find it suitable to ease interest rates at its monetary policy committee meeting in November, by 350 basis points to 12 percent say. For this meeting in May, I think holding rates would be more appropriate: hiking rates further even as real interest rates are negative may not be of much use. Thus, the Bank of Zambia may choose to keep its benchmark interest rate unchanged at 15.5 percent when it announces its decision on 13 May.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz. 

Non-violence is Juju’s best bet

By Rafiq Raji, PhD

South Africa’s President Jacob Zuma probably regrets the day he decided Julius Malema had to be removed as president of the African National Congress (ANC) Youth League and expelled from the ruling ANC party. ‘Juju’ – as Mr Malema is affectionately known (which actually means ‘sorcery’ in popular Nigerian parlance) – has been unrelenting in his onslaught against the embattled South African leader. Mr Zuma probably assumed Juju lacked enough substance to be able to carry his own weight outside of the ANC. He judged poorly. With no ANC party machinery to restrain him, Juju has been firing on all cylinders. President Zuma has been easy prey in any case. With all the numerous corruption allegations against Mr Zuma, Mr Malema has been spoilt for choice. More substantively, the Economic Freedom Fighters (EFF) – the ultra-leftist and populist party Mr Malema founded in July 2013, just a little over a year after his ejection from the ruling ANC in April 2012 – went ahead to secure significant gains in the May 2014 general elections, earning more than 1 million votes and securing 25 seats in the 400-member South African parliament; no small feat for a youth leader in about 2 years after being removed from his comfort zone. A little digression: For Nigerian and other African youths who harp constantly about old men refusing to give up power, Mr Malema’s rise is instructive. No one hands over power voluntarily.

In a revealing interview with Al Jazeera recently, Mr Malema threatened a violent retaliation should authorities continue to harass and beat up EFF members. He actually threatened to remove President Zuma’s government “through the barrel of a gun,” raising longstanding worries about a potentially violent dimension to EFF’s economic freedom advocacy. Having watched the interview myself, it is noticeable his remarks were premeditated and well thought through. He offered the view without pressure from the interviewer, Jonah Hull – who by the way did a great job masking his excitement at the excellent scoop and was incidentally once at the receiving end of Juju’s acerbic tongue. To ensure that the remarks were fully taken, the interviewer asked him to clarify them and was candid as to why. Mr Malema was unrelenting. In response, the ANC has asked the police to investigate Mr Malema for treason, an overreaction by most accounts. Analysts agree that since his threat of violence was conditional, the charges are not likely to hold. Incidentally, the National Prosecution Authority (NPA) faces a dilemma. Just last week, a South African High Court set aside an earlier ruling that quashed about 800 corruption charges against Mr Zuma – which enabled him become president after the ouster of then President Thabo Mbeki. If the NPA chooses to pursue Mr Malema – the case for which is very weak – while refusing to pursue charges against Mr Zuma, it would raise questions about responsibility and diligence. It would certainly raise eyebrows if the almost 800 corruption charges are not reinstituted against the South African president; especially as he is not likely to thread the path of honour and resign, despite wide-ranging calls for him to do so. In any case, Mr Malema re-affirmed his threat of violence conditional upon same from authorities at the very well-attended Economic Freedom Fighters (EFF) manifesto launch – which dwarfed earlier launch events by rival parties, especially that of the ruling ANC – on 30 April 2016.

Juju and his EFF have been successful thus far due to their fervent, aggressive, and populist but non-violent rhetoric. This approach broadens their appeal. I hope the EFF would not test this recent violent rhetorical approach any further. It would do no one any good. And if Juju desires revolutionary credentials, he should know that glory would only come if he successfully uses non-violent means to mobilize the majority of South Africans – especially its teeming youth population (who are mostly unemployed by the way) – towards building the rainbow nation of Nelson Mandela’s dreams; one where there is not only racial equality but economic equity as well. There is a lot of history and knowledge on how ownership of assets by itself does not create wealth. Africa’s relatively slow progress provides ample evidence on this. Skill and expertise matter. In Africa, South Africa has the enviable position of having both rich mineral and highly skilled human resources. Its leaders, whether in the ANC or the EFF, must strive to harness both. What needs to be found is the right balance between seeking equity for all South Africans while continuing to provide incentives for capitalism to thrive and for wealth to continue to be created. Despite his socialist rhetoric, I still believe this is Julius Malema’s desire as well. If not, it may fall on him to provide that dose of realism when the EFF eventually secures power. What is likely in local government elections slated for August – EFF’s first – is that the EFF would likely win some council seats. This should enable it show South Africans its own flavour of governance as it aims to secure the presidency in due course. But there is now not any doubt that the EFF has become a force to be reckoned with. Judging from the overwhelming show of support for the EFF during the weekend, the radical party may actually be in a position to determine who becomes South Africa’s next president in 2019; that is, if it does not succeed in getting its own candidate elected. But with its current momentum, it would not surprise me at all if the EFF actually produces the next South African president in 2019. Still, the party needs to convert its supporters into actual voters. Also, Mr Malema should not be totally dismissive of the Democratic Alliance (DA) – currently South Africa’s leading opposition party in parliament. Although the party’s first black leader, Mmusi Maimane, has been relatively successful in projecting an increasing sense of diversity within the DA, that is not yet a reality in fact. DA’s task should now be to work harder towards being seen more as an aspirational party for all South Africans as opposed to the middle-class and white interests party it is still perceived to be. All of these are possible in an atmosphere of non-violence. So even as Juju and his EFF become ever more popular, voices should and must be raised high to ensure Juju gets the message that non-violence is his best bet to succeed; as is also the case for all South Africans.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz.