Economic Watch

South Africa in last chance saloon

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South Africa last week dodged the bullet of a sovereign debt downgrade to junk status, stepping through the door of the last chance saloon, where it will remain for the next six months.

Whether the country will emerge from the saloon with a swagger come June next year, will largely depend on the leadership, especially political, of the country. However, they will have to persuade the leadership of corporate South Africa and the local investment community to also draw their pistols and come out fighting.

That seems to be the consensus message from the three major international credit ratings agencies after Standard & Poor’s (S&P) on Friday last week became the last of the ‘big three’ to complete its rating of the country.

For most laymen looking at the intricate world of international finance, much of their pronouncements are difficult to follow, but one thing is clear, S&P believes “political events have distracted from growth-enhancing reforms and persistently low GDP growth continues to dampen per capital wealth levels and the country’s fiscal performance”.

It is particularly the turmoil, which developed around the position of President Jacob Zuma and the scandals and controversies associated with him, that generates high political tensions and feeds negative sentiments towards the country as an investment destination with economic growth potential.

About high political tensions, S&P highlights that during the last 12 months:

  • The former finance minister, Nhlanhla Nene, was removed from office on 9 Dec. 2015;
  • The Constitutional Court ruled against President Jacob Zuma on 31 March, 2016;
  • The ANC lost some of the key cities (Johannesburg, and Tshwane [Pretoria]) in the 3 August municipal elections;
  • The National Prosecuting Authority pursued fraud charges against the current finance minister, Pravin Gordhan, and other former SARS employees in October 2016, before dropping them in the same month; and
  • A North Gauteng High Court ruling led to the publication of the “State of Capture” report, which shed light on alleged corruption between private individuals and public office bearers.

“We believe that against this backdrop, tensions and contestations are increasing in the run-up to the ANC’s December 2017 elective conference.

“We think that ongoing continued tensions and the potential for event risk could weigh on investor confidence and exchange rates, and potentially affect government policy direction,” it reports.

Private sector

While local politicians in recent times have often accused the private sector of disloyalty or even deliberate economic sabotage by withholding investment, S&P points out that:

“South Africa’s pace of economic growth remains a ratings weakness. It continues to be negative on a per capita GDP basis. While the government has identified important reforms and supply bottlenecks in South Africa’s highly concentrated economy, delivery has been piecemeal, in our opinion.

“The country’s longstanding skills shortage and adverse terms of trade also explain poor growth outcomes, as does the corporate sector’s current preference to delay private investment, despite high margins and large cash positions.”

Next six months

According to a Bloomberg report the National Treasury recognises the country’s weaknesses and is committed to structural reforms to boost economic growth, which should help ward off a downgrade at the next round of assessments. Policy continues despite “rising political noise”, the Treasury said in a statment.

“We can celebrate for a few hours, come Monday we must roll up our sleeves and get down to work and do what is necessary to make sure that come six months’ time we will not be panicking,” Lungisa Fuzile, the head of the Treasury, said by phone.

Thabi Leoka, an economist at Argon Asset Management in Johannesburg, said: “This is the final warning, if we continue moving sideways, we risk being downgraded.”

Domestic factors are not the only, but very much the most important influence on the outcome of the next round of credit rating in June next year – a situation best summarised by the following paragraph from the S&P report:

“Ongoing continued tensions and the potential for event risk could weigh on investor confidence and exchange rates, and potentially affect government policy direction.”

This “event risk” might include the fallout of a new president taking office in the United States in the person of Donald Trump, economic developments in China or the impact of Britain leaving the European Union (Brexit).

Much more important, however, are the “even risks” associated with how the governing ANC will manage the exit of President Zuma, at the latest at its elective congress in a year’s time, but more importantly in the run-up to its “consultative conference” in June next year.

The latter, more than anything else, will determine whether the South African economy will be leaving last chance saloon with a swagger or on a stretcher.

Also read: Zuma survives for now, but effects will last for years

                   Rebuilding a post-Zuma South Africa

by Piet Coetzer

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