Economic Watch

Battle for the grades and South Africa’s ‘9-12’

Heinrich Kruger

Due to some external factors and some self-inflicted wounds South Africa is facing the prospect of an existential threat to its economy.

The USA had its 9-11, South Africa had its ‘9-12’ when President Jacob Zuma suddenly replaced his finance minister in December last year.

The main difference between 9-11 and ‘9-12’ is that South Africa’s disaster was self-inflicted.

But could the present national economic crisis have been avoided if ‘9-12’ did not happen?

Most likely not, but it would have been somewhat easier to deal with than is presently the case. The president, however, might have some serious self-inflicted political wounds from which he is unlikely to recover.

The DA should also tread somewhat more carefully than it did last week with the parliamentary debate on the budget, or it could easily suffer some serious reputational damage itself.

The statement issued by its chief spokesperson on finance, David Maynier, on the eve of the debate, was at best ill-advised.

Aiming a political shot at the bow of Minister of Finance Pravin Gordhan while he was on foreign shores fighting for South Africa’s very economic survival, Maynier said the minister should have put the debate first, and then travelled to the UK and US to drum up investor confidence. This smacks of petty, opportunistic political point-scoring, happening at a time when the Moody’s credit ratings agency was visiting the country to consider the possibility of a South African credit downgrade.

Broader perspective

Accompanied by much media and commentator hype, there is a need for a more balanced perspective on that visit and the danger of a downgrade by the particular agency.

If ‘9-12’ did not happen it might have been a bit less intense, but the present situation with Moody’s would not have been avoided.

One just has to look at what has been, and is, happening to other emerging and developing economies around the globe to realise that South Africa was bound to come to this point.

Last week Moody’s senior vice-president Elena Duggar said that “risks to global growth have increased, but despite the recent market volatility, we don't believe that the world's advanced economies will enter a recession.”

For developing and emerging economies it is a totally different picture.

In February the agency took negative rating action for a number of corporates, banks and sovereigns whose revenues, loan portfolio performance and tax receipts are heavily dependent on the production of oil and other commodities.

The credit ratings of more than 10 oil producing nations in the developing world, including Russia, Kazakhstan, Nigeria, Angola and Gabon, were placed on review for a downgrade.

There is no reason to expect that South Africa would be excluded from this process, considering the structure of its economy.

Nature of SA’s crisis

The crisis facing South Africa – still a maturing democracy, plagued by high levels of inequality, poverty, unemployment and socio-political volatility – is also not unique.

At a different level and scale it looks very similar to a dilemma faced by China, about which Moody’s in a recent research note, said that it is bound to fail in at least one of its three conflicting aims: to achieve growth, institute reform and maintain stability.

China’s three policy objectives formed an “impossible trinity”. Beijing could at best achieve only two of those objectives at any one time.

While China is in need of serious restructuring of its economy to a more consumer- driven one, South Africa also needs some fundamental economic restructuring to become less dependent on the export of basic commodities.

Moody’s behind the pack

The general impression that developed last week on the eve of the visit by Moody’s to South Africa, pending a regrade, that the country is facing the prospect of immediate downgrade to junk status, is also not quite correct.

Moody’s, as far as international ratings agencies are concerned, was really running behind the pack and was, at the time of writing, likely to accord South Africa the level of rating just above junk status. While Standard and Poor’s and Fitch ratings agencies grade South Africa one notch above junk status, Moody’s had the country two levels above junk before its visit.

The real moment of truth is likely to come around June when Standard and Poor’s and Fitch’s rating of South Africa is likely to come up for review.

There is still some, although preciously little, time left for South Africa to mount a fight- back.

It will call for a truly national, cross-sectoral effort to avoid the danger of such an event, which in the present South African environment – including a crucial election amid high levels of social unrest – is almost too ghastly to contemplate.  

What ‘9-12’ has done is to seriously dent South Africa’s institutional credibility, shake investor confidence and add to their worries about an economy growing at less than 1%, high inflation, a balance of payments hole, weak commodity prices, frequent labour unrest and power shortages.


While on his ‘roadshow’ abroad, Minister Gordhan in a radio interview from Boston in the USA said that he told Moody’s that “we have never broken a fiscal promise that we’ve made in our 20 years as a democracy”.

In another interview he said: “We have a good story to tell, but clearly we need to prove to ourselves and to them (ratings agencies) that we’re capable of working together to grow the economy, create jobs and make our fiscal framework a viable one.”

The last thing that South Africa now needs is the impression that its ‘commanding officer’ in the battle for economic survival, Minister Gordhan, is facing a rebellion or fifth column.

Consider the reaction of one of the investment bankers who attended a Gordhan ‘roadshow’ meeting in London: “I left the place thinking the minister has good intentions, hopefully he stays in his job.”

Issues like the controversial investigation by the Hawks against a unit established inside the Treasury to deal with matters like threats of economic crime, should be put to bed as quickly as possible.

And the question whether it is in the country’s best interest to have Mr Zuma removed as president is debatable. If it happens as the result of a process of law, let it be so. But to turn it into a disruptive, all consuming #Zuma-must-fall political campaign is probably not the best option.

If South Africans, in all their formations, can prove that they can deal with a crisis around their constitutional head of state in managed and dignified way, it will be a huge step towards achieving the status of a mature and stable democracy.

It will go a long way towards improving confidence, also of investors, in the future stability of the country.

                                                                                                                                                                                 by Heinrich Kruger

(Heinrich Kruger is managing director; Kruger International and can be contacted at [email protected] )

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