SONA | Currency Comment


SONA has come and gone and, as expected, it was a bit of a circus. However, two things of interest were mentioned by the President.

  • The establishment of a state-owned bank
  • The establishment of a sovereign wealth fund.

Excuse my scepticism on both, but when I was a pimply-faced teenager, I also had aspirations of driving a Lamborghini Countach. I even had a poster of one adorning my bedroom wall and I used to imagine that, one day, I would be driving through the streets of Monaco with my arm dangling out the window – all whilst my science and maths homework remained unattended in my school bag.
State bank
I guess it’s possible, but my only question is where the deposits will magically materialise from. As for a sovereign wealth fund – a cursory glance at ‘Investopedia’ has the following:

  • A sovereign wealth fund is a state-owned pool of money that is invested in various financial assets. The money typically comes from a nation's budgetary surplus. When a nation has excess money, it uses a sovereign wealth fund as a way to funnel it into investments rather than simply keeping it in the central bank or channelling it back into the economy.

Anyone see the problem here?
The focus now moves toward the upcoming budget and Moody’s response a few weeks later. Yesterday Moody’s had this to say:

  • Moody’s Investors Service could cut its rating for South Africa if the nation can’t rein in spending, boost growth and improve tax compliance to stabilise its debt ratios, said Lucie Villa, the firm’s lead sovereign analyst for South Africa.
  • Would probably downgrade if the nation’s fiscal and economic strength erodes further, she wrote in an emailed response to questions
  • A downgrade would mean it is less likely that growth will be enough to “preserve current income levels for the majority and halt the rise in government debt over the medium term”
  • Moody’s would probably change outlook to stable from negative if conditions are met to stabilise debt ratios
  • More sluggish growth in South Africa worsens debt dynamics, which will be important to the future of its rating
  • “Everything else equal, a downward revision of 0.1pp in nominal growth in 2020 means that debt/GDP will be 0.07 pp of GDP higher in 2020.”

The part in bold confused me somewhat.
Balance sheet
It’s becoming clear that the focus is going to be on the spending side of the balance sheet because the revenue side isn’t improving (for reasons I’ve written about in the past). And so the only way to balance the books is on the spending side (remember we have a sovereign wealth fund to work on).

  • This is the key part of the budget that will reveal our fate. I’m not sure how material spending cuts can be achieved, but I guess we will have to wait and see.
  • Should taxes go up, it would be another negative drain on the economy.
  • This may make unions unhappy – are they ever anything else?
  • And ordinary South Africans may be unhappy – they would have reason to be.
  • But, will Moody’s be unhappy, or will they grant us another reprieve?

The good Finance Minister has an unenviable task ahead of him:

  • There is no money left in the cupboards
  • The economy is going nowhere
  • SOEs continue to drain money from the fiscus like a runaway Hoover machine

And the powers-that-be continue to deliberate about unachievable lofty goals without attending to the existing problems.
Comment and rates accurate as at 19 February 09h00.