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Rating agencies may change SA outlook to stable if Zuma exits – RMB analyst

Speculation this week about President Jacob Zuma possibly being booted out by his party this weekend has been a big factor in markets. The rand has strengthened on the prospects, while SA bonds look appetising. But there could be a further market upswing if Zuma does go: rating agencies’ negative outlook of South Africa could be changed to stable, says Celeste Fauconnier – Africa Analyst at RMB. Regardless of what happens, South Africa is still a good investment destination in Africa, says Fauconnier as she reflects on the recently ended World Economic Forum for Africa. – Gareth van Zyl

This podcast is brought to you by RMB. I’m speaking to Celeste Fauconnier, who is an Africa Analyst at RMB.

Celeste, this week South Africa has seen a lot of political news. Zuma might be going, according to some speculation. How do you think this will impact ratings of South Africa and the investment sentiment around the country going forward?

Yes, it’s definitely a very important week. We are looking at what the possibility is of a recall. I’m definitely not going to make a call on that but we can at least say that if there is a recall, what that will do from a ratings agency perspective: we think that S&P post a recall will probably change their outlook from negative to stable. But unfortunately, the rating needs to remain unchanged at BB+. We can’t see that they will change it back into an investment grade. It takes an average of six years for a country to move back into that bracket.

So, from a positive side, negative to a stable outlook, similar with Moody’s – they will probably see that there is still a weak macroeconomic backdrop and the impact of the fiscal position. But the outlook would almost certainly change from negative to stable as well, from a Moody’s perspective and from a Fitch perspective we don’t think there will be any implication. So, to answer your question, a rating going from negative to stable is increasingly good for sentiment, so we will definitely see that the positiveness and the Africa or South African economy will improve again and we will see the possibility of an influx or an improvement of inflows into the economy. I mean, we have seen an outflow because of the political turmoil we have been seeing over the past few months. But it hasn’t been significant and we must remember that it is also based on the fact that the emerging markets generally have been doing well.

Finance Minister Malusi Gigaba

We can actually see that when Minister (Malusi) Gigaba was appointed as Finance Minister, that the rand didn’t move as much as what the market would have expected and this is purely and fortunately because the EM (emerging markets) environment was still doing well. Essentially, we will still remain a junk status economy, but we are still one of the better investment environments in Africa. We only have a few other countries that are investment grade, to name a few: Botswana, Namibia, Mauritius, and Morocco and we are still seen as the pillar of the economies in Africa.

A few weeks ago you and I were both at the World Economic Forum. What did you make of what Malusi Gigaba had to say about our economy?

Yes, so very positive and it’s always nice to hear the positiveness, but we also need to be realistic about the growth rates we are going to see and then also the political instability that we’ve seen, how that will come out for the growth for South Africa this year. But one thing that I want to mention, during Minister Gigaba’s presentation there was a panel (some of the panel members from Europe) and the question was, “Will they still invest into South Africa?” And it was amazing to see that they were still very positive. They said that they will definitely continue nurturing the relationship with the South African government and definitely the private sector regardless of the recent downgrade, so that was very positive.

RMB’s Africa analyst Celeste Fauconnier.

Minister Gigaba used every opportunity to ensure the investors that South Africa remains a good investment destination and I do agree with him, but unfortunately, some of the things he said, especially saying that the rand was not affected really by cabinet reshuffle I think was too optimistic, because we did see some movement in the market and we are clearly seeing that the politics have been influencing the rand movement, especially over the past two years. However, he mentioned that the country is still democratic. I definitely agree with that. I think we will see this weekend what will happen, but essentially, what made me happy is that the European investors on that specific panel said that they will continue to invest and nurture the relationship.

Flag map of the People’s Republic of China

China has also experienced a downgrade. How is that going to affect South Africa, considering that we may get a stable rating (if Zuma goes). How is that going to affect us and how is that going to affect the rest of Africa potentially?

I don’t think we will see a significant effect. We must remember that China’s investment into Africa is resource-based, it’s infrastructure-based, it’s manufacturing based and for China to want to continue with their growth rate, they still need African resources and our labour costs remain relatively low compared to China labour costs. So, I think the relationship between African nations and China will continue regardless of the downgrade. Now, there might be a drop in future investment, but meaning a drop in the volumes of investment because, obviously we will see a drawback of investment into China because of the downgrade. But essentially, I don’t think this will have a significant effect. I think the relationship between China and Africa will continue strongly.

I think maybe we can also talk about – at the World Economic Forum – how McKinsey & Company had a fantastic breakfast looking at the relationship between Africa and China. They are basing it on a document that they will release soon called “The Dance of the Dragon and the Lion”. It was quite a positive report and something that is quite nice to get our hands on actual data on the relationship between China and the African continent and so too South Africa. South Africa was one of the countries that was analysed in the publication. Looking at three very interesting statements that they made on the relationship between China and Africa, which I didn’t really know, more than 60% of business activity in Africa is actually from the Chinese private sector.

There is the view that it’s mostly from state-owned enterprises in China, but it’s not. If we look at it in dollar terms, yes, it is the state-owned enterprises that dominate the investment into Africa, but if we look at it footprint wise, it’s the private sector. Another interesting aspect that I remembered was that more than 10 000 Chinese businesses are already operating in Africa. That’s a significant amount. I can’t see that any of them would want to withdraw any time soon, regardless of the Chinese downgrade. Then my third aspect that was very important was that more than 80% of the workforces of Chinese businesses in Africa are actually local Africans. It’s not Chinese and we all have the assumption that they’re taking away jobs from locals in Africa. The downside here is that most of the managerial positions are Chinese citizens, so I think that’s something that the relationship can work on between the Chinese and African private sector.

Very interesting, so should any new administration in the future in South Africa or any other African countries then look to actually strengthen their ties with China, despite the criticisms around it?

Absolutely, I don’t think it will harm any relationship with the Chinese downgrade between Africa and China. I think we do expect the relationship to grow even further over the next few years. I think this downgrade will put pressure on the Chinese growth rate over the medium term and of course that essentially affects Chinese demand for resources. So, we might see slightly more pressure than what we initially expected on your commodity demand from Africa, but I don’t think it’s something to be notably concerned about.

Amid this rise of China, where does Africa stand with its relationship with Europe and the US?

The relationship is still strong. The US and the Eurozone or the EU is still your second and third-largest trade partners of the continent. I don’t think that will change any time soon. My biggest concern is that we heard at the World Economic Forum that in June, President Donald Trump will be sitting with his team to discuss the US view on Africa. It’s going to be quite interesting to see what his views are because we have been discussing rumours of what he would do; we’ve been discussing the trade agreement with the US. I think firstly, the trade agreements will remain solid. We do know that the AGOA Agreement cannot be changed by President Trump and so that is a positive, but we will have to start looking at whether Donald Trump will cut donor aid to certain aspects, whether he will increase aid to the military presence in Africa.

File Photo: US President Donald Trump

So, those are the aspects we need to look at, but I don’t think we need to be too concerned about the trade agreement. It’s really a wait and see, it’s very difficult to predict what he will do in June, but we will definitely let you guys know what is happening from that side. From the Eurozone perspective, I think the recent French election was a positive for the relationship between Africa and Europe. There was previously the concern of Frexit, especially after Brexit, but that’s not a concern anymore, that’s off the table.

With the Brexit, we have seen the affect to some extent, on the trade relations between Africa and the UK and of course, the UK is the second-largest donor funder into Africa. We do expect some of that funding will still grow, but the extent of growth will be lower than what we have seen over the past few years, purely because the UK has their own balance of payments or balance sheet problems. So, that’s the biggest concern we are seeing. I don’t think China will fall off our list of our biggest trade partner and also very interesting tidbit from McKinsey is that they are actually now the largest donor funder into Africa.

So, I don’t expect anything will change significantly and I think our relationship will still continue with the US and Europe, but the growth in that will be slightly less.

Obviously, Trump is coming under quite a bit of pressure after he fired FBI Director James Comey. Do you think that the possible exit of Trump would change your forecast?

Well, it’s quite difficult to tell because we don’t know yet what his view is on Africa. If he’s impeached, I don’t actually know the process very well of what will happen and who will come in then, but I think that the African relations with the US will be put on the backburner; at least the discussions on changes in the relationship will be put on the backburner. I don’t think the current trade and donor funding and investments will change anytime soon because I think it will be very much lower on their priority list to discuss if there is a Trump impeachment.

Looking more broadly at Africa, at the end of 2011, the Economist published a cover entitled “Africa is Rising”. Six years later, do you think that’s still the case?

Oh absolutely. I think it was a more positive story five years ago before the commodity price slump, but we are seeing that commodity prices are slowly but surely improving again. We are seeing that some of the governments have actually realised how important it is to diversify, so we are seeing more plans in your bigger economies to diversify these economies away from the dependence on commodities. The biggest thing to do for Africa now is industrialisation and that was also a key theme at the World Economic Forum, but what was very important that was mentioned in one of the panels, is that the gap of using low cost textile manufacturing as a means to industrialise your economy is diminishing so quickly.

Just to use an example, this process of low cost textile manufacturing was used in your economies like South Korea, Cambodia, Bangladesh, etc. But now we are seeing an influx of robotics starting to come into the fore and that makes Africa’s gap to industrialise via textiles very narrow. So, unless Africa takes that gap now, it will be too late in the medium to long-term to use that as a means of industrialising. Then, Africa will start to have to think of other aspects of how to industrialise and build the manufacturing sector.

Of course, we have the problem of electricity. That doesn’t help in industrialisation at all and we do see that economies are starting to invest even more in power or building the power grids in the economies. Good examples here, Nigeria is working on it at the moment, Ghana, and Zambia specifically. So, I think if we work more on that, industrialisation will be key and then we will see that Africa is rising even more then over the next few years.

Celeste, it’s been an interesting discussion again, thanks for speaking to me today.

Thank you, Gareth. Have a good day. Bye.

This podcast was brought to you by RMB.

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