What financial experts say about South Africa being junked

 ·4 Apr 2017

The downgrade of South Africa’s sovereign debt rating to junk status by Standard & Poor’s (S&P) was only  a surprise because it happened so soon after president Jacob Zuma’s cabinet reshuffle.

This is the view of several financial experts who said that it calls into question, the credibility of new finance head, Malusi Gigaba.

At around midnight on 30 March 2017, the president announced a reshuffle of his Cabinet, which included the sacking of finance minister Pravin Gordhan and his deputy, Mcebisi Jonas.

Gordhan was replaced by Malusi Gigaba, who previously served as minister of home affairs and minister of public enterprises, and who has very little background in finance and economics, holding a BA degree in education and a Master’s in social policy.

On the day after the reshuffle, Fitch Ratings commented that the changes – including the dismissal of Gordhan and his deputy – signal “a change in policy direction” that could “potentially weakening public finances and standards of governance”.

The ratings agency said it believed that “fiscal consolidation is likely to become less of a priority” and that recent momentum in improving transparency and governance of state-owned enterprises (SOEs) “will be halted”.

As a result, SOEs’ liabilities and therefore contingent liabilities to the government “will probably grow more rapidly”.

On Monday evening, Standard & Poor’s (S&P) sent shock waves through South Africa when it downgraded the country’s foreign currency rating to BB+ – officially sub-investment grade – while local currency debt has been downgraded to BBB- (one notch above junk).

Both ratings carry a negative outlook, meaning further downgrades may lie ahead.

Hours after, ratings agency Moody’s confirmed that it would also be placing the country on review for downgrade.

Moody’s currently has its South African rating at Baa2, two notches above junk. This means that should it too announce a downgrade rating, it will not necessarily mean junk status for South Africa.

A number of financial experts have since commented on the possible outcomes for South Africa following the actions of the ratings agencies. BusinessTech took a snapshot of what the mood is like among the country’s business analysts.

Dawie Roodt – independent economist 

“I think pretty much everybody in the finance world realised that it was coming (junk status) but that it happened only 90 hours after the reshuffle perhaps came as a bit of a surprise and shows how strongly the ratings agency feels about the changes.”

Roodt said it was “virtually certain” that the other two ratings agencies would follow suit.

The economist said the only silver lining was that S&P’s decision might perhaps be the catalyst that pushed president Zuma over the brink.

“The moment Zuma decides to step aside, South Africa incorporated will immediately become a buy. We will see an immediate uptick in growth, a rapid inflow of foreign direct investment with a commensurate decrease in unemployment and increased economic growth,” Roodt said.

Neil Roets – CEO, Debt Rescue

Roets said that the downgrade will have an immediate impact on all South Africans because it would complicate the process of economic recovery, further impact on the already sky-high unemployment rate and will make the treasury’s job of collecting enough taxes to fund the government’s spending spree more difficult.

“There is a massive misconception among many South Africans that decisions by ratings agencies impact mostly wealthy South Africans. Nothing could be further from the truth because the reality is that it will have a profoundly negative effect on all of us.

“The Reserve Bank will be under pressure to review the repo rate upwards which will increase the repayments on mortgage bonds, credit card debt and the cost of virtually all other goods and services.

“We have one of the lowest growth rates in the BRICS group of countries and this downgrade – whether or not the other two ratings agencies decide to follow suit – is going to massively impact the economic recovery process in this country.”

Sean Ashton – CIO, Anchor Capital

“We have reached the critical juncture in South Africa. We’ve seen fiscal degradation happen for some time, we think it will accelerate if the status quo remains.

“This downgrade had a lot to do with – calling into question the credibility of Treasury and some of the other state institutions that were previously sacrosanct.

“We think that the credibility of tyhe new finance minister (Malusi Gigaba is in question). There is a heightened probability of him signing off on projects that South Africa cannot afford.”

Dr Azar Jammine – economist, Econometrix

Dr Azar Jammine said if the rand continues to decline, inflation would not come down as much as anticipated.

“That is bad news for the whole economy‚ including small business.”

He said there was nothing new finance minister Gigaba could do to appease investors. “He is seen as a Gupta acolyte.”

Christie Viljoen – senior economist, KPMG

Viljoen said that a downgrade to junk will result in an outflow of investment funds from bonds and equities as many local and international investment funds are mandated to place their money in investment-grade jurisdictions only.

“This, in turn, will adversely affect the value of the rand, increase the cost of imports, and keep inflation elevated for longer. The South African Reserve Bank (SARB) would have to adjust its monetary policy stance accordingly.

“Meanwhile, uncertainty over the short-term trajectory of local politics will weigh on local and foreign investor sentiment – and hamper the investment needed to address South Africa’s challenges of unemployment, poverty and inequality.”

Wayne McCurrie – fund manager, Ashburton Investments

This is truly the first catastrophe in the new SA. If not corrected we have already started on the downward slippery slope to disaster.

“This is the first time in 25 years that I have started to loose hope for all of us. Unless corrected we truly are no longer a rainbow nation.”

Read: Infographic: How credit ratings work and how junk status will affect you

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