31/03/2017 06:14 SAST | Updated 31/03/2017 06:30 SAST

Peter Montalto: This Is An Attack On South Africa's Treasury And Will Trigger Multiple Downgrades

Zuma is 'much stronger than the market thinks he is . . . This is not over yet.'

Gallo Images / Alet Pretorius
President Jacob Zuma

This is a power show by President Jacob Zuma who clearly believes he has enough power in the African National Congress (ANC) national executive committee (NEC) and low enough risk of a Parliament split to be removed, to basically do what he wants here.

As expected PGxit occurred with both Pravin Gordhan and his deputy Mcebisi Jonas removed from the Finance Ministry in an open attack on National Treasury. The reshuffle is designed to lubricate the way to the elective conference through Treasury and a variety of major other ministries.

The market will struggle to digest Malusi Gigaba as the new finance minister. He is someone who has been effective at home affairs but is clearly being put in a role to do a particular job by Zuma and viewed as loyal to Zuma. Similarly with Sfiso Buthelezi, the new deputy finance minister.

We view this as an open attack on Treasury to replace people who are conservative and anti-corruption with people loyal to Zuma to help the Zuma faction win in December. This is an attack on the institution of National Treasury and as such will trigger multiple downgrades. As we've highlighted before, whilst there are some fiscal risks we are more worried about Treasury's role in procurement, preventing corruption and oversight of state-owned entitities (SOEs) including nuclear and banking. We think this is bad for the market and for South Africa. Equally there are questions hanging over Buthelezi around his role at the Passenger Rail Agency of South Africa (Prasa) and the links of both to various others such as the Guptas. This will concern the market and I think the market will be deeply worried by these appointments.

Looking at this list it really is a list of largely unknowns . . . Importantly Mosebenzi Zwane remains mining minister which was a Top 6 ask that he be removed given his closeness to Zuma. Other ministers who were seen as under-performing Zuma loyalists like Social Development Minister Bathabile Dlamini and Communications Minister Faith Muthambi moved portfolio but stayed in Cabinet.

Zuma is taking a risk here and the next step is to watch what happens with resignations. There is a key risk of resignations now from South African Communist Party (SACP) members and it was a surprise that more of them haven't been removed. Maybe he wants to goad them to go to allow for a bigger reshuffle next. It is odd that, for instance, Nkosazana Dlamini Zuma hasn't entered at this stage . . . maybe he is waiting for Deputy President Cyril Ramaphosa to resign and then put her there? This is the next step we watch for. This is not over yet.

We must also consider the growth shock here like after Nene-gate is going to make things harder on the fiscal side with difficult choices on revenues and probably a decision to debt finance instead. This will reinforce the need for ratings downgrades. But as we said before, fiscal will not be the main focus but procurement etc.

The market has been far too complacent that Zuma cannot remove Gordhan but he has now gone and done it and yet the market is still hanging onto the hope of a credible candidate which has not come with a complete clear out at Treasury. This is a full-whack Zuma-led reshuffle which will lead to multiple imminent downgrades where Zuma is confident he has the upper hand over weak internal ANC opposition. The market will be watching blowback risk now as the next reason to be too positive on this. The opposition to Zuma is too split with too weak a leadership in the NEC to be effective here. Zuma believes he is, and we think he is, much stronger than the market thinks he is. The market has a lot of catching up to do still I think to the reality on the ground.