Will Gordhan’s budget appease investors?

Cape Town - South Africa’s government is repairing the credibility lost when President Jacob Zuma fired his finance minister last year, with the annual budget likely to include measures needed to appease investors and ratings companies, the head of Africa’s biggest fixed-income money manager said.

Credit: GCIS

South Africa's finance minister, Pravin Gordhan. Picture: Linda Mthombeni, GCIS

“Everyone is expecting a very good news story and they are going to get a very good news story,” Andrew Canter, chief investment office of Futuregrowth Asset Management, which oversees about R150 billion ($9.9 billion) in assets, said in an interview in Bloomberg’s Cape Town office on Tuesday. “There is a change in the sentiment around confidence. It’s been remarkably fast and I think if they stay on the path they are on, it will continue to prevail.”

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Zuma’s appointment of David van Rooyen as his finance minister in place of Nhlanhla Nene in December drove the rand to a record low, caused benchmark bonds to jump by the most ever and raised fears that the nation’s credit rating would be downgraded to junk. Zuma did an about-turn four days later and reappointed Pravin Gordhan to the post which he had held from 2009 until 2014, the first step in a concerted government bid to rebuild the country’s reputation.

Reaping dividends

Both Zuma and Gordhan, who delivers the budget speech on Wednesday, have said that retaining the country’s investment-grade credit rating is a top priority. They have held several meetings with business leaders to gauge their views on how to achieve that goal. The nine provincial administrations have been warned that their budgets will be cut, while Zuma focused his February 11 State of the Nation Address on wooing investors.

Those efforts are reaping dividends. The rand has surged 8.1 percent against the dollar over the past month, the most among 16 major currencies monitored by Bloomberg, while benchmark 10-year bond yields fell 42 basis points. Demand at the weekly government debt auction on Tuesday outstripped the R2.35 billion of securities on sale by a factor of more than six, the most this year.

If Futuregrowth had doubts about the government’s creditworthiness, “we would be short duration and we are not particularly short duration”, Canter said. “Believe me they don’t want to default. I still think the central bank and Treasury have good credibility and are still independent enough to do the right thing and so far have done so.”

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Futuregrowth has favoured buying short-dated inflation-linked bonds since late last year, taking the view that the outlook for consumer prices will deteriorate as a result of the rand’s slump. The inflation rate surged to 6.2 percent in January, the highest in 17 months, and is set to average 6.8 percent in 2016, the central bank forecasts.

“We now expect inflation to be peaking well into the 7 percent range in the fourth quarter of this year,” Canter said. Futuregrowth predicts inflation will average 6.7 percent this year, and close to that level in 2017.

Rate increases

The international bonds of state-owned companies such as Eskom and Transnet also look attractive and the chances they will default are slim, according to Canter.

The Reserve Bank, which targets inflation between 3 percent and 6 percent, increased its benchmark repurchase rate by 50 basis points to 6.75 percent on January 28, even as the economy is forecast to expand at the slowest pace in seven years in 2016. Canter expects the bank to continue raising rates, possibly by another 100 basis points this year.

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He also sees the rand as likely to strengthen along with a recovery in commodity prices.

“I think the rand really got oversold in December,” he said. “If I had to go long or short on the rand right now, I would rather go long. The rand should continue to strengthen.”

The rand strengthened 0.3 percent to 15.2335 per dollar by 5pm in New York on Tuesday.

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Be sure to follow #Budget2016 developments on Business Report as we bring you news, reviews, analysis and opinion regarding Finance Minister Pravin Gordhan's speech on February 24 and 25.

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